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Reference rate reform has the potential to create issues when accounting for contract modifications and hedging relationships. As a result, the FASB issued guidance that introduced ASC 848, Reference Rate Reform, to the Codification. The guidance is designed to provide temporary optional expedients when performing certain accounting analysis and assessing the related impacts that may otherwise be required as a result of modifying derivative contracts and other agreements due to reference rate reform. It also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Users of this guide are encouraged to understand the optional expedients available in ASC 848 to determine whether those optional expedients are eligible to be applied. PwC’s Reference rate reform guide is intended to assist in the application of the guidance in ASC 848. Figure DH 1-1 outlines the key areas impacted and related guide references.
Figure DH 1-1
Topical areas impacted by reference rate reform
Topical area
REF reference
DH reference
General
Hedge documentation requirements
Changes to the critical terms of a hedging relationship
Excluded components
Fair value hedges
Changes to the designated benchmark interest rate
Shortcut method of assessing hedge effectiveness
Rebalancing hedging relationships
Cash flow hedges
Probability of the forecasted transaction
Changes to the hedged risk
Hedging a group of forecasted transactions
Changes to the designated method of assessing hedge effectiveness
Rebalancing hedging relationships
Shortcut method of assessing hedge effectiveness
Applying the options terminal value method of effectiveness (perfectly effective)
Applying the options terminal value method of effectiveness (not perfectly effective)
Applying the change-in-variable-cash-flows method of effectiveness
Applying the hypothetical derivative method of effectiveness
Applying a quantitative method of effectiveness:
Hypothetical derivative method
Change-in-variable-cash flows method
Change-in-fair-value method
Applying a qualitative assessment of effectiveness
Applying the simplified hedge accounting approach method of effectiveness
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