On January 7, 2021, the FASB issued ASU 2021-01,1 which refines the scope of ASC 8482 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities. The ASU permits 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 under way in global financial markets (the “discounting transition”).
FASB Accounting Standards Update (ASU) No. 2021-01, Reference Rate Reform (Topic 848): Scope.
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 Group’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.
Under the ASU, if an entity adopts any of the amendments related to a hedging relationship and the entity is either (1) a private company that is not a financial institution as described in ASC 942-320-50-1 or (2) a not-for-profit entity (other than 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), the entity is required to update its hedge documentation before the next interim (if applicable) or annual financial statements are available to be issued. All other entities that adopt any such amendments are 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 ASU for that hedging relationship.
FASB Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.