FASB accounting standards codification topic 815, derivatives and hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. Among those risks is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate (referred to as interest rate risk).

In the US, eligible benchmark interest rates under topic 815 are interest rates on direct Treasury obligations of the US government (UST), the London interbank offered rate (LIBOR) swap rate, the overnight index swap (OIS) rate based on the federal funds effective rate, and the Securities Industry and Financial Markets Association (SIFMA) municipal swap rate.

Based on concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York recently identified a broad Treasury repurchase agreement (repo) financing rate referred to as the secured overnight financing rate (SOFR) as its preferred alternative reference rate.

FASB’s proposed accounting standards update (ASU) would add the OIS rate based on SOFR as a fifth US benchmark interest rate to help companies and other organisations avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument.

The deadline for comments on the ASU is 30 March.

Details of the ASU are here.

Report by Pat Sweet