New FASB ASU extends reference rate reform relief

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Breaking it down

On Dec. 21, 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which extends the sunset (or expiration) date of ASC Topic 848, “Reference Rate Reform,” from Dec. 31, 2022, to Dec. 31, 2024.

The FASB made this change to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not discontinued as of Dec. 31, 2021, as was originally expected. Because some of the more commonly used LIBOR tenors will continue to be published until June 2023, the FASB concluded an extension of the ASC 848 sunset date was necessary to ensure reporting entities could continue to benefit from the relief the FASB initially provided when it issued ASC 848.

Crowe observation: Amended definition of SOFR. Since its initial publication as an overnight borrowing rate, the Secured Overnight Financing Rate (SOFR) has evolved to include not only an overnight rate but also several forward-looking, term-based versions, including one-month, three-month, six-month, and 12-month tenors. Given these market developments, the FASB originally proposed to amend the definition of SOFR in the FASB ASC Master Glossary to acknowledge the different versions of SOFR now available as well as to enable reporting entities to treat term-based versions of SOFR as eligible benchmark interest rates¹ in certain hedging strategies available under ASC 815 (for example, a fair value hedge of benchmark interest-rate risk).

During its redeliberations, the FASB ultimately decided not to amend the definition of SOFR. It also decided to discontinue its separate project related to reference rate reform and fair value hedging. The FASB noted that while it continues to observe the market transition for reference rates, it still is possible for entities to utilize hedge accounting without the proposed benchmark amendments.

Next steps

ASU 2022-06 is effective for all reporting entities immediately upon issuance and must be applied on a prospective basis.

¹ The FASB ASC Master Glossary defines a benchmark rate as “a widely recognized and quoted rate in an active financial market that is broadly indicative of the overall level of interest rates attributable to high-credit-quality obligors in that market.”