November 13, 2020
Hillary H. Salo
Technical Director
Financial Accounting Standards Board
401 Merritt 7, PO Box 5116
Norwalk, CT 06856-5116
RE: File Reference No. 2020-900
Dear Ms. Salo:
PricewaterhouseCoopers LLP appreciates the opportunity to comment on the Proposed Accounting Standards Update, Reference Rate Reform (Topic 848), Scope Refinement. We commend the FASB for its continuing efforts to monitor global reference rate reform developments, issue accounting guidance to respond to market events, and to ease potential burdens in accounting for the effects of reference rate reform.
We support the proposed amendments. However, we have certain suggestions that we believe would help clarify the proposed amendments for stakeholders.
We understand that the Board intends for modifications associated with the discounting transition (as described in the Summary and Questions for Respondents within the exposure draft) to qualify for the contract modification relief in ASC 848-20 even if this transition does not directly replace, or have the potential to replace, a reference rate within the scope of paragraph 848-10-15-3 as provided in 848-20-15-2. To avoid any confusion regarding the Board’s intent that derivatives affected by this change are eligible for contract modification relief, including relief from reassessing whether a modified derivative is a hybrid instrument or includes a financing element, we believe the Board should clarify paragraph 848-20-15-2A as follows.
Certain optional expedients in this Subtopic, if elected, shall apply to derivative instruments that meet the scope of paragraphs 848-10-15-3 and 848-10-15-3A that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.
We also believe the guidance in the Summary and Questions for respondents section that identifies the provisions of ASC 848 that were not amended by the ASU, but can be applied to derivatives affected by the discounting transition, should be included in the codification. We believe this table is helpful in understanding the full scope of relief offered by the proposed amendments. One possible way to accomplish this would be to include the table in an implementation guidance section within the Codification.
The appendix contains our responses to the Questions for Respondents and other comments and suggestions for the Board’s consideration.
* * * * *
If you have any questions regarding our comments, please contact Chip Currie at (908) 581-4208 or Heather Horn at (310) 874-5449.
Sincerely,
PricewaterhouseCoopers LLP
Appendix
Question 1–Scope Refinement: Do you agree that the scope of Topic 848 should be refined to include contracts that do not reference a rate expected to be discontinued as a result of reference rate reform but that are affected by the discounting transition? Why or why not?
Yes, we support the Board’s decision to amend the scope of Topic 848 given that its intent was to provide relief for contracts amended by market-driven events related to reference rate reform. Contracts that are affected by the discounting transition fall into this intended scope and therefore should be eligible for relief in Topic 848.
In addition, to ensure the guidance is interpreted consist with that we believe to be the Board’s intent, we believe the Board should clarify the scope of paragraph 848-10-15-3A. We believe that changes for the discounting transition may occur to collateral arrangements related to derivative instruments (such as a credit support annex) that are structured as “collateralized-to-market” and for which the collateral is accounted for separately from the derivative instrument. We understand it was the Board’s intent to include both “collateralized-to-market” and “settled-to-market” derivative instruments affected by the discounting transition to be within the scope of the proposed amendments, including the ability to apply certain hedge accounting relief optional expedients when there is a change in the fair value of a derivative instrument. We suggest the following edit to paragraph 848-10-15-3A:
Certain provisions of the guidance in this Topic, if elected by an entity, shall apply to derivative instruments and collateral arrangements related to derivative instruments that do not meet the scope of paragraph 848-10-15-3 that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform.
Paragraph 848-30-25-6 allows an entity to effectuate the changes because of reference rate reform by entering into a fully offsetting derivative contract to effectively cancel the original derivative contract. This paragraph was not included in the “Provisions That Apply to Derivatives Affected by the Discounting Transition That Were Not Directly Amended” table within the Summary and Questions for Respondents. We understand that entities may remove a basis swap following the discounting transition discussed in paragraphs 848-30-25-9 and 848-30-25-9A by entering into a fully offsetting derivative. We therefore believe that adding paragraph 848-30-25-6 to the “Provisions That Apply to Derivatives Affected by the Discounting Transition That Were Not Directly Amended” table would be beneficial to stakeholders.
Question 2–Operability: The Board is proposing amendments in this Update to the expedients and exceptions in Topic 848 to capture the incremental consequences of the proposed scope refinement and tailor the existing guidance to derivative instruments affected by the discounting transition. Are those proposed amendments complete and operable? If not, what suggestions do you have and why?
We agree that the proposed amendments are complete and operable outside of the suggested edits noted within this letter.
Question 3–Effective Date and Transition: Do you agree with the proposed effective date and transition guidance? Why or why not?
Yes, we support the proposed effective date and transition guidance.
Question 4–Ongoing Monitoring: Are there other accounting consequences related to reference rate reform that the Board should consider?
We are not currently aware of any other accounting consequences related to reference rate reform that the Board should consider. However, we believe the Board should continue to monitor market developments related to reference rate reform and solicit feedback from stakeholders.
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