Rahim M. Ismail
Professional Accounting Fellow
Dec. 10, 2018
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author's colleagues upon the staff of the Commission.
Good morning. Today I would like to provide an update on implementation activities related to the new credit losses standard, and on a consultation regarding a shift from the London Interbank Offered Rate (LIBOR).
The conversations around credit losses have continued to move from a focus on understanding the standard to a focus on implementing the standard. This evolution has been reflected in recent OCA consultations. Last year at this conference, one of my colleagues discussed questions we had received on scoping. This year, I would like to share some observations on a recently completed pre-filing consultation.
The consultation consisted of two specific application questions related to a registrant's proposed accounting policy for loan charge-offs upon the adoption of the new credit losses standard. The first question related to whether the determination of the loans to be charged off should be performed at the individual loan level or at the pool level for purposes of applying Topic 326's guidance that "writeoffs shall be recorded in the period in which the financial asset(s) are deemed uncollectible." The registrant took the view that while the new credit losses standard requires an entity to pool loans based on similar risk characteristics for purposes of determining the allowance, the loans retain their individual characteristics. Therefore, the registrant concluded that it would assess loans at the individual loan level for the purpose of determining when they should be charged off. The staff did not object to the registrant's conclusion.
The second question related to whether the registrant would consider all relevant information, including relevant portfolio level information, in determining whether a loan is uncollectible for accounting purposes. The registrant pointed out that, although Topic 326 provides guidance on write-offs it does not provide guidance on assessing collectability. As part of its analysis, the registrant concluded that it should consider all relevant information, including individual loan attributes and historical loss experience for similar loans, in determining when a loan is deemed uncollectible. The staff did not object to the registrant's conclusion.
Next, I wanted to discuss a market change that could significantly impact the accounting for many registrants. To reiterate Chairman Clayton's comments from last week,  there has been a lot of progress made to facilitate the potential transition away from LIBOR.
As Chairman Clayton highlighted, SEC staff members and other regulators participate on the Alternative Reference Rates Committee (ARRC) and SEC staff have been actively monitoring the efforts by the ARRC and others to help transition current and future contracts away from LIBOR to an acceptable alternative. OCA has been attentive to considerations relating to the accounting implications of the transition. We have been encouraged by the ongoing dialogue among various stakeholders which has resulted in the identification of a number of potential accounting considerations. In this regard, the Financial Accounting Standards Board (FASB) has recently issued an accounting standard, which would allow for the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) to be designated as a benchmark interest rate. In addition, the FASB has added a project to its agenda to consider changes to GAAP necessitated by the anticipated transition away from LIBOR. OCA is supportive of these efforts and will continue to monitor the accounting issues, and we are available for consultation on any accounting matters that may arise.
We have also received a consultation from a stakeholder about the impact of the anticipated transition away from LIBOR on existing cash flow hedge accounting relationships. The stakeholder noted that there are existing cash flow hedge relationships of variable rate debt instruments where the hedged item is documented as LIBOR based interest payments. The stakeholder requested the staff's view on two questions.
The first question related to whether the LIBOR based interest payments identified in cash flow hedge documentation are probable of occurring. In order to apply hedge accounting, the forecasted transaction being hedged, in this case the LIBOR based interest payments, has to be probable of occurring. The stakeholder requested the staff's view on whether registrants could continue to assert that cash flow hedges where the hedged item is documented as LIBOR based interest payments are probable of occurring for variable rate debt whose terms extend beyond the anticipated transition away from LIBOR. The stakeholder shared its view that hedge documentation involving LIBOR based cash flows implicitly considers the rate that would replace LIBOR, thereby allowing an entity to continue to assert that the hedged item is probable of occurring. The staff did not object to this view.
The second question was whether and how the expected transition away for LIBOR would impact the assessment of hedge effectiveness of a cash flow hedge of LIBOR based variable rate debt. In order to apply hedge accounting, a hedge must be assessed as highly effective both on a prospective and retrospective basis. The stakeholder shared its view that, as part of its assessment of hedge effectiveness, an entity could consider an expectation that anticipated changes to LIBOR will impact both the hedged item (e.g., forecasted interest payments on debt) as well as the hedging instrument (e.g., interest rate swap). The stakeholder further asserted that in light of this expectation, the anticipated transition away from LIBOR in and of itself would not impact the effectiveness of the hedge. The staff did not object to this view.
Thank you for your attention.
 FASB ASU No. 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (June 2016) which is codified in ASC Topic 326, Financial Instruments – Credit Losses
 See Robert B. Sledge, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2017 AICPA Conference on Current SEC and PCAOB Developments (December 4, 2017), available at: https://www.sec.gov/news/speech/sledge-aicpa-2017-conference-sec-pcaob-developments
 ASC 326-20-35-8
 ASC 326-20-30-2 and ASC 326-20-55-5
 See Jay Clayton, Chairman, U.S. Securities and Exchange Commission, SEC Rulemaking Over the Past Year, the Road Ahead and Challenges Posed by Brexit, LIBOR Transition and Cybersecurity Risks (December 6, 2018), available at: https://www.sec.gov/news/speech/speech-clayton-120618
 The Federal Reserve Board and the Federal Reserve Bank of New York (Fed) have been part of an effort to introduce an alternative reference rate in the United States. In 2014, the Fed convened the Alternative Reference Rates Committee (ARRC), made up of a consortium of major financial institutions and other market participants, with a goal of identifying a suitable alternative to LIBOR. https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Sept-20-2018-FAQ.pdf
 See supra note 5.
 FASB ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
 ASC 815-20-25-15(b)
 ASC 815-20-25-75 and ASC 815-20-25-79