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ASC 848 includes optional expedients for qualifying modifications to financial assets under ASC 310, debt agreements under ASC 470, and leases under ASC 840 or ASC 842. ASC 848 also provides a principle that could be applied to contract modifications that fall within the scope of ASC 848 but are not explicitly specified in ASC 848 (e.g., contracts within the scope of ASC 606).
The optional expedients are meant to provide entities with the ability to conclude that qualifying contractual amendments should be treated as a modification or continuation of the existing contract without having to perform an assessment that would otherwise be required under GAAP.
2.1.1 Optional expedients: qualifying modifications
A reporting entity may elect to apply an optional expedient in accordance with ASC 848-20 to contract modifications that:
  • replace, or have the potential to replace, LIBOR or another reference rate expected to be discontinued with a different interest rate index (e.g., replacing LIBOR with SOFR), and
  • do not modify terms that change, or have the potential to change, the amount and timing of cash flows unrelated to the replacement of LIBOR or another reference rate expected to be discontinued (ASC 848-20-15-2 through ASC 848-20-15-3).

An election to apply an optional expedient under ASC 848-20 must be applied consistently to all eligible contract modifications subject to the same ASC Topic or Industry Subtopic (see REF 1.2.1).
New guidance
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of ASC 848 to include derivatives that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform (“the discounting transition”). A reporting entity may elect to apply the optional expedient in ASC 848-20 for derivatives that are modified due to the discounting transition. This is not limited to derivatives that have a variable interest rate being changed that references LIBOR or another reference rate that is anticipated to be discontinued (see REF 1.3.1.3).
2.1.2 Optional expedient for financial assets under ASC 310
A reporting entity may elect to apply an optional expedient pursuant to ASC 848-20-35-6 to qualifying modifications (see REF 2.1.1) of contracts within the scope of ASC 310. Under the expedient, a reporting entity will account for modifications as if they were a minor modification in accordance with ASC 310-20 and thus a continuation of the existing contract. As a result:
  • the amortized cost basis will consist of the remaining amortized cost basis in the original loan (which includes any unamortized net fees or costs from the original loan), and any additional fees received and direct loan origination costs associated with the restructuring,
  • a new effective yield is established based upon the new amortized cost basis and the revised cash flows, and
  • no gain or loss is recognized.

2.1.3 Optional expedient for debt agreements under ASC 470
A reporting entity may elect to apply an optional expedient pursuant to ASC 848-20-35-8 to qualifying modifications (see REF 2.1.1) of contracts within the scope of ASC 470. Under the expedient, a reporting entity will account for amendments as if the modification was not substantial in accordance with ASC 470-50 and thus a continuation of the existing contract. As a result:
  • the new carrying amount will consist of the carrying amount of the original debt (which includes any unamortized fees from the original debt agreement and any unamortized premium or discount) and any additional fees between the debtor and creditor associated with the replacement or modified debt instrument,
  • a new effective yield is established based upon the new carrying amount and the revised cash flows, and
  • no gain or loss is recognized.

Third-party costs directly related to the exchange or modification (such as legal fees) are required to be expensed as incurred in accordance with ASC 470-50-40-18(b).
The debt modification and extinguishment guidance in ASC 470-50-40-12(f) requires a “lookback period” such that if within a year of the current debt modification or exchange, the debt has been exchanged or modified without being deemed to be substantially different, the debt terms that existed prior to the most recent modification or exchange are required to be used to determine whether the current exchange or modification is substantially different. However, once a debt modification or exchange accounted for under ASC 848 occurs, all prior debt modifications or exchanges will no longer be subject to the “lookback period.” That is, ASC 848-20-35-10 requires any subsequent debt modification or exchange analysis to consider only the terms and provisions in effect immediately following the most recent modification or exchange under ASC 848.
2.1.4 Optional expedient for leases under ASC 840 or ASC 842
A reporting entity may elect to apply an optional expedient, pursuant to ASC 848-20-35-11 to qualifying modifications (see REF 2.1.1) of contracts within the scope of ASC 840 or ASC 842. Under the expedient, a reporting entity will not be required to:
  • reassess lease classification,
  • reassess the discount rate,
  • remeasure lease payments, or
  • perform other reassessments or remeasurements that would normally be required under ASC 840 or ASC 842 when a modification of the lease contract is not accounted for as a separate contract.

2.1.5 Principle in applying ASC 848 to other instruments
ASC 848-20 provides specific guidance for modifications of instruments subject to ASC 310, ASC 470, ASC 840, and ASC 842 as these topics cover instruments that will likely have the highest volume of contracts expected to be impacted by reference rate reform. However, ASC 848-20-35-3 through ASC 848-20-35-5 provide an optional election for instruments with modification guidance in other areas of GAAP not specifically addressed in ASC 848 if the contract modification qualifies under ASC 848-20 (see REF 2.1.1).
Under this principle, the modification should be treated as an event that does not require contract remeasurement at the modification or reassessment of a previous accounting determination under the relevant ASC Topic or Industry Subtopic. ASC 848-20-55-2 illustrates the potential outcomes in applying this expedient to contracts subject to guidance not specifically addressed in ASC 848.
2.1.5.1 Applying the principle to derivatives
A reporting entity may elect to apply the principle in ASC 848-20-35-4 to qualifying modifications (see REF 2.1.1) of derivatives within the scope of ASC 815. As described in ASC 848-20-55-2, a reporting entity that applies the optional expedient to qualifying contract modifications of derivatives will not be required to:
  • reassess the derivative to determine if it is a hybrid instrument, or
  • reassess whether the derivative includes a significant financing element in accordance with ASC 815-10-45-11 through ASC 815-10-45-15.

ASU 2021-01, Reference Rate Reform (Topic 848): Scope, clarifies that this guidance can also be applied to derivatives that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.
2.1.6 Reassessment of embedded derivatives
A reporting entity may elect to apply an optional expedient pursuant to ASC 848-20-35-14 to qualifying modifications (see REF 2.1.1) to not have to reassess embedded derivatives under ASC 815-15. Under the expedient, a reporting entity will not be required to reassess its original conclusions as to whether the contract contains an embedded derivative that is clearly and closely related to the host contract under ASC 815-15-25-1(a).
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