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The guidance in ASC 848 was available to be adopted upon issuance for all entities. While it provided immediate accounting relief (if adopted), the relief is meant to be temporary (see REF 4.1.4), as reference rate reform is considered temporary in nature due to the expectation that certain LIBOR settings will be discontinued by the end of 2021, with the remainder discontinued in 2023. The relief provided within ASC 848 lasts until December 31, 2022 and is meant to coincide with the period that global financial markets will transition away from reference rates that will cease to exist.
4.1.1 Contract modifications effective date and transition
As discussed in REF 1.3, the guidance must be elected for contract modifications for arrangements within a given ASC Topic or Industry Subtopic (e.g., all lease modifications within ASC 842). A reporting entity may elect to adopt the guidance for contract modifications:
  • as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or
  • prospectively from a date within an interim period that includes or is subsequent to March 12, 2020.
A calendar year-end company, for example, could have adopted the guidance in Q1 2020.
Once the application of ASC 848 is elected for an ASC Topic or an Industry Subtopic, it needs to be applied prospectively for all eligible contract modifications for that ASC Topic or Industry Subtopic (see REF 1.3) made prior to December 31, 2022. However, it may be elected for different ASC Topics or Industry Subtopics during different reporting periods. For example, a company may elect to apply an optional expedient for all contract modifications that would have been accounted for under ASC 310 in Q1 but elect to apply an optional expedient for all contract modifications that would have been accounted for under ASC 470 in Q2.
A reporting entity may elect the guidance in ASU 2021-01 for contract modifications of derivatives that change the interest rate used for margining, discounting, or contract price alignment:
  • retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or
  • prospectively to new modifications within the interim period including or subsequent to January 7, 2021.
Once elected, the guidance must be applied for all contract modifications that change the derivatives interest rate used for margining, discounting, or contract price alignment.
4.1.2 Hedge accounting effective date and transition
ASC 848 can be applied to eligible hedging relationships that exist as of the beginning of an interim period that includes March 12, 2020 and to new eligible hedging relationships designated in subsequent periods. The optional expedients may not be applied, however, to hedging relationships evaluated after December 31, 2022 (with limited exceptions described in REF 4.1.5).

Excerpt from ASC 848-10-65-1(a)(2)(i)

If an entity elects to apply any of the pending content that links to this paragraph for an eligible hedging relationship existing as of the beginning of the interim period that includes March 12, 2020, any adjustments as a result of those elections shall be reflected as of the beginning of that interim period and recognized in accordance with Subtopics 848-30, 848-40, and 848-50 (as applicable). If an entity elects to apply any of the pending content that links to this paragraph for a new hedging relationship entered into between the beginning of the interim period that includes March 12, 2020 and March 12, 2020, any adjustments as a result of those elections shall be reflected as of the beginning of the hedging relationship and recognized in accordance with Subtopics 848-30, 848-40, and 848-50 (as applicable).

A reporting entity may elect the guidance in ASU 2021-01 for hedge accounting to eligible hedging relationships (See REF 3.1.1 for the scope of hedge relationships eligible for the guidance in ASU 2021-01):
  • as of the beginning of any interim period that includes March 12, 2020, and
  • new eligible hedging relationships entered into after the beginning of an interim period that includes March 12, 2020.
Question REF 4-1 addresses the application of the hedge accounting relief when the election occurs in a subsequent reporting period to the period in which the qualifying event occurred.
Question REF 4-1
In Q1 20X1, a reporting entity elects to adopt the optional expedient in ASC 848-30-25-11C to adjust the amount in accumulated other comprehensive income for a cash flow hedge affected by a cash settlement relating to a change in interest rate used for margining, discounting, or contract price alignment. The interest rate used for margining, discounting, or contract price alignment changed in Q4 20X0. When should the adjustment be recognized?
PwC response
The reasonable method used to adjust the amount in accumulated other comprehensive income should be applied retrospectively to Q4 20X0, as this is the reporting period in which the derivative’s interest rate changed. ASC 848-10-65-2(a)(2) states that if a reporting entity elects to apply the guidance in ASU 2021-01 to any hedging relationship, “any adjustments as a result of those elections shall be reflected as of the application date of the election.” It is our understanding that the application date is the date that the modification of the derivative occurred and the optional expedient is applied to that event. Therefore, a reporting entity that elects to apply an optional expedient to an event that occurred in a prior reporting period should apply a reasonable method to adjust the amount in accumulated other comprehensive income retrospectively and revise Q4 20X0 within subsequent financial statements.
4.1.3 Transition disclosures
ASC 848-10-65-1(e) and ASC 848-10-65-2(d) require reporting entities that have elected to apply the guidance in ASC 848 to disclose the nature of and reason for electing to apply an optional expedient under ASC 848. Disclosure must be made in each interim and annual period in the fiscal year of application.
4.1.4 ASC 848 sunset date
The guidance in ASC 848 cannot be applied to contract modifications or hedging relationships after December 31, 2022 with limited exceptions. Those limited exceptions relate to certain hedging optional expedients that, if elected, would continue to be applied subsequent to December 31, 2022. Those exceptions pertain to:
  • the optional expedient to change the systematic and rational method used to recognize in earnings excluded components (see REF 3.1.5),
  • the approach to measuring the hedged item in a fair value hedge resulting from the optional expedient to change the designated benchmark interest rate and component of cash flows (see REF 3.2.1),
  • the optional expedient to adjust the fair value hedge basis adjustment using a reasonable method in a fair value hedge accounted for under the shortcut method (see REF 3.2.3),
  • the optional expedient to adjust the amount recorded in accumulated other comprehensive income using a reasonable method in a cash flow hedge (see REF 3.3.7), and
  • the optional expedient to not periodically evaluate certain conditions when determining whether the shortcut method for assessing hedge effectiveness may continue to be applied for a fair value hedge (see REF 3.2.2).

4.1.5 Private company considerations
For entities that have not yet adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, application of the hedging optional expedients in ASC 848 are limited to the following:

Excerpt from ASC 848-10-65-1(c)

  1. An optional expedient allowing changes in critical terms of a hedging relationship in paragraphs 848-30-25-3 through 25-7.
  2. An optional expedient allowing a change to the method designated for use in assessing hedge effectiveness in a cash flow hedge in paragraph 848-30-25-8 if the optional expedient method being elected is the simplified hedge accounting approach for eligible private companies for initial hedge effectiveness in paragraph 848-50-25-8 or for subsequent hedge effectiveness in paragraph 848-50-35-7.
  3. An optional expedient allowing an entity to assume that the hedged forecasted transaction in a cash flow hedge is probable of occurring in paragraph 848-50-25-2.
  4. An optional expedient allowing an entity to assume that the reference rate will not be replaced for the remainder of the hedging relationships in paragraph 848-50-25-11(a) for initial hedge effectiveness and paragraph 848-50-35-17(a) for subsequent hedge effectiveness when the entity is using any of the methods for assessing and measuring hedge effectiveness in a cash flow hedge on a quantitative basis and if both the hedged forecasted transaction and the hedging instrument have a reference rate that meets the scope of paragraph 848-10-15-3.
  5. An optional expedient allowing an entity to disregard certain requirements of the simplified hedge accounting approach for eligible private companies for initial hedge effectiveness in paragraph 848-50-25-8 or for subsequent hedge effectiveness in paragraph 848-50-35-7 in a cash flow hedge.

Excerpt from ASC 848-10-65-2(c)

An entity that has not adopted the amendments in Update 2017-12 may elect the optional expedient allowing a change to the method designated for use in assessing hedge effectiveness in a cash flow hedge in paragraph 848-30-25-11A(b) if the optional expedient method being elected is the simplified hedge accounting approach for eligible private companies for subsequent hedge effectiveness in paragraph 848-50-35-7.

The other hedge accounting optional expedients in ASC 848 are not available to be elected until ASU 2017-12 is adopted.
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