Alert: FASB Accounting Standards Update 2020-04 - Facilitation of Effects of Reference Rate Reform on Financial Reporting

Category: US GAAP

Alert: FASB Accounting Standards Update 2020-04 - Facilitation of Effects of Reference Rate Reform on Financial Reporting

On March 12, 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

Interest rate benchmarks play an important role in financial markets. The post-crisis declines in liquidity in interbank unsecured funding markets and cases of attempted market manipulations undermined confidence in the reliability and robustness of some existing benchmarks. Many interbank offer rates (IBORs) are expected to be replaced by new reference rate(s). The biggest issues presented by the replacement of IBORs are the potential effect on accounting for contract modifications and hedge accounting.

The amendments in this ASU provide elective expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

Contract Modifications

The following optional expedient are permitted for modified contracts, and must be applied consistently for all eligible contracts or eligible transactions:

  • Contracts within the scope of Topic 310 Receivables and Topic 470 Debt – Modifications should be accounted for prospectively adjusting the effective interest rate.
  • Contracts within the scope of Topic 840 Leases and Topic 842 Leases – Modifications should be accounted for as a continuation of the existing contracts with no reassessments of the lease classification, the discount rate, or remeasurement of lease payments.
  • Contracts within the scope of Subtopic 815-15 Derivatives and Hedging – Embedded Derivatives – An entity is not required to reassess the previous determination of bifurcation of embedded derivatives from its host contract.
  • Contracts for which explicit relief is not stated – An entity is not required to remeasure contract at the modification date or reassess previous accounting determination.

Hedge Accounting

The amendments allow an entity to continue hedge accounting without de-designation upon the following changes:

  • A change to the critical terms of the hedging relationship.
  • A change to rebalance or adjusting hedging relationship in a fair value hedge.
  • A change in the method used to assess hedge effectiveness in a cash flow hedge.

Excluded Components

The amendments allow a change in the systematic and rational method used to recognize the excluded components into earnings and adjust the fair value of the excluded component through earnings.

Fair Value Hedges

The amendments provide the following optional expedients for fair value hedging relationships for which the derivative designated as the hedging instrument is affected by reference rate reform:

  • The amendments allow an entity to change the designated benchmark interest rate and continue fair value hedge accounting. The method applied to change the designated benchmark interest rate must be reasonable, consistently applied, and result in either adjustment of the hedged item’s cumulative fair value hedge basis adjustment or maintain the hedged item’s cumulative basis adjustment.
  • An entity may continue to apply the shortcut method for existing hedging relationships.

Cash Flow Hedges

The amendments provide the following optional expedients for cash flow hedging relationships affected by reference rate reform:

  • An entity should disregard the potential change in the designated hedged interest rate risk and continue hedge accounting for a cash flow hedge if either the hedge is expected to be highly effective or an optional expedient is elected.
  • An entity may continue hedge accounting upon a change in the hedged risk as long as the hedge is still highly effective.
  • The methods, used to initially and subsequently assess hedge effectiveness, may be adjusted to disregard certain mismatches between the designated hedging instrument and the hedged item because of reference rate reform.
  • An entity may elect to subsequently assess hedge effectiveness using a qualitative method, if an entity has performed an initial hedge effectiveness assessment for a cash flow hedge.
  • For cash flow hedges of portfolios of forecasted transactions, an entity may disregard the requirement that individual hedged transactions must share the same risk exposure.

Debt Securities Classified as Held to Maturity

The amendments permit a one-time election to sell, transfer or both sell and transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and that are classified as held to maturity before January 1, 2020.

Effective Date

The ASU is effective for all entities as of the date of issuance of this ASU through December 31, 2022. The amendments must be applied prospectively.

To access the full script of ASU No. 2020-04, click here.


This communication contains a general overview of the topic and is current as of July 24, 2020. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person’s use of or reliance upon this material. © MNP LLP 2020. All rights reserved.

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Michelle Balmer CPA, CA

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Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.