FASB Proposes Update to Benchmark Interest Rates
On February 20, 2018 FASB proposed an Accounting Standards Update "that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting." This update would allow the new secured overnight rate, SOFR, to be an allowed benchmark interest rate for hedge accounting (ASC 815).
This proposal relates to the evolving situation for LIBOR reform and/or replacement. Starting April 3, 2018, the new overnight secured rate, SOFR, will be published and this proposal gives the market a strong indication that FASB will accept SOFR as an eligible index for hedging interest rate risk.
Accepting SOFR as an Alternative Rate Replacement will be a key step in managing the hedge accounting implications of changes to LIBOR in the market. It still remains to be seen how this may impact hedge effectiveness, contract amendments or fallback provisions for pre-existing hedge relationships.
We've also prepared a summary of all the changes afoot as the efforts to reform and/or replace LIBOR progress, and everything you need to think about to be prepared.
About Principia Partners
Principia Partners LLC provides solutions for derivative and fixed income operations. Global financial institutions and independent asset managers have used the award-winning Principia Analytic System since 1995 to unify valuations, portfolio management, risk surveillance, hedge accounting and operational control across the breadth of fixed income and derivative products. In 2015, Principia launched its Analytic Service, pasVal, to make its award-winning pricing and analytics available to an even broader range of businesses.