On October 29, 2020, the FASB issued a proposed ASU1 that would refine the scope of ASC 8482 and clarify some of its guidance as part of the Board’s monitoring of global reference rate reform activities. The proposed amendments would permit entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest (PAI3) in connection with reference rate reform activities underway in global financial markets (the “discounting transition”).
FASB Proposed Accounting Standards Update (ASU), Reference Rate Reform (Topic 848): Scope Refinement.
For titles of FASB Accounting Standards Codification (ASC or the “Codification”) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”
PAI is also referred to as the price alignment amount (PAA) by the London Clearing House, and price alignment (PA) by the Chicago Mercantile Exchange.
See the CME’s “SOFR Discounting Transition Process for Cleared Swaps,” August 2020.
FASB Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.
Once finalized, the guidance in the proposed ASU would require any private company that is not a financial institution as described in ASC 942-320-50-1 and any not-for-profit entity (except for a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market) and that adopts any of the proposed amendments related to a hedging relationship to update its hedge documentation before the next interim (if applicable) or annual financial statements are available to be issued. All other entities would be required to update their hedge documentation no later than when those entities perform the first quarterly hedge effectiveness assessment after making any elections in the proposed ASU for that hedging relationship.
FASB Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.