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FASB issues accounting standards update to add a new benchmark interest rate in the United States

Published on: 07 Nov 2018

The FASB recently issued ASU 2018-16,1 which amends certain provisions of ASC 815.2

The ASU permits entities to use the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) rate as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815. Other acceptable benchmark interest rates would continue to be “the interest rates on direct Treasury obligations of the U.S. government, the [LIBOR] swap rate, the Fed Funds Effective Rate [OIS] Rate, and the [SIFMA] Municipal Swap Rate.” The ASU defines the SOFR OIS rate as the “fixed rate on a U.S. dollar, constant-notional interest rate swap that has its variable-rate leg referenced to the [SOFR] (an overnight rate) with no additional spread over SOFR on that variable-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equates to the present value of the variable cash flows.”

Effective Date

Entities that have not yet adopted ASU 2017-123 must adopt ASU 2018-16 when they adopt ASU 2017-12. If an entity has already adopted ASU 2017-12, the effective date of ASU 2018-16 will be as follows:

  • For public business entities, for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.
  • For all other entities, for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted in any interim period after issuance of the ASU. Entities will adopt the ASU prospectively “for qualifying new or redesignated hedging relationships entered into on or after the date of adoption.”

Also, as indicated on the FASB’s Web site, the Board decided to add a separate project to its agenda “to broadly consider changes to GAAP necessitated by the market-wide transition away from LIBOR, which includes but is not limited to the transition of existing hedging relationships referencing LIBOR.”


1 FASB Accounting Standards Update (ASU) No. 2018-16, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.

2 FASB Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging.

3 FASB Accounting Standards Update No. 2017-12, Targeted Improvements to Accounting for Hedging Activities.

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