FASB Adds SOFR to List of US Benchmark Rates Eligible for Hedge Accounting | Practical Law

FASB Adds SOFR to List of US Benchmark Rates Eligible for Hedge Accounting | Practical Law

The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which added the overnight index swap rate based on the Secured Overnight Financing Rate (SOFR) to its list of US benchmark rates to which hedge accounting treatment may be applied.

FASB Adds SOFR to List of US Benchmark Rates Eligible for Hedge Accounting

Practical Law Legal Update w-017-3223 (Approx. 4 pages)

FASB Adds SOFR to List of US Benchmark Rates Eligible for Hedge Accounting

by Practical Law Finance
Published on 31 Oct 2018 • USA (National/Federal)
The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which added the overnight index swap rate based on the Secured Overnight Financing Rate (SOFR) to its list of US benchmark rates to which hedge accounting treatment may be applied.
On October 25, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), which added the overnight index swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) to its list of US benchmark rates to which hedge accounting treatment may be applied.
Eligible benchmark interest rates include:
  • Interest rates on direct Treasury obligations of the US government (UST).
  • The London Interbank Offered Rate (LIBOR) swap rate.
  • Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate.
  • The OIS Rate based on the Secured Overnight Financing Rate (SOFR).
  • The SIFMA Municipal Swap Rate.
FASB stated that the accounting standards update will facilitate the transition from LIBOR to SOFR and provide adequate time for entities to prepare for changes to interest rate risk hedging strategies. In 2017, in response to concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified a broad Treasury repurchase agreement (repo) financing rate referred to as SOFR as its preferred alternative reference rate (see Legal Update, New York Fed Publishes New Benchmarks). Regulators plan to phase out LIBOR by the end of 2021.
The inclusion of the OIS Rate based on the SOFR will be effective:
  • For fiscal years beginning after December 15, 2018, and interim periods within those fiscal years for public companies that have already adopted Accounting Standards Update 2017-12.
  • For fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, for all other companies and organizations that have already adopted Accounting Standards Update 2017-12.