FASB Releases New Standard Clarifying Certain Aspects of Hedge Accounting Guidance
November 25, 2025
The Financial Accounting Standards Board says the ASU published on Nov. 25 also addresses several incremental hedge accounting issues arising from the global reference rate reform initiative.
The Financial Accounting Standards Board published an Accounting Standards Update on Nov. 25 that the board says clarifies certain aspects of the guidance on hedge accounting and addresses several incremental hedge accounting issues arising from the global reference rate reform initiative.
“The new standard clarifies the application of previous guidance and addresses emerging issues identified by stakeholders, including those related to reference rate reform,” FASB Chair Richard Jones said in a statement. “The improvements will better reflect the economics of organizations’ risk management activities.”
Reference rate reform refers to the global transition away from referencing rates such as the London Interbank Offered Rate (LIBOR) and toward new reference rates that are more observable or transaction-based, such as the Secured Overnight Financing Rate, according to top 15 accounting firm CohnReznick.
“Historically, LIBOR has been widely used as an interest rate benchmark (i.e., reference rate). The move away from LIBOR is therefore a significant change for both financial markets and many organizations,” CohnReznick said in a 2023 blog post. “LIBOR rates have frequently been referenced in many types of arrangements such as debt agreements with variable rates of interest, derivative instruments (e.g., the variable leg of an interest rate swap), and lease agreements with variable rents. As reference rates such as LIBOR are replaced with new ones such as SOFR, organizations may modify existing contracts to effect the transition to new reference rates. Such modifications could be initiated by, for example, an organization’s lender or an organization may decide there is a compelling economic reason to proactively consider changing contractual terms. Accordingly, the impact of reference rate reform isn’t limited to a particular industry or type of organization, as it could affect any contract that contains a reference rate subject to reform.”
In 2020, the FASB released ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for—or recognizing the effects of—reference rate reform on financial reporting.
Topic 848’s objective was to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when LIBOR would cease being published. In 2021, the U.K.’s Financial Conduct Authority delayed the intended cessation date of certain tenors of U.S. Dollar LIBOR to June 30, 2023.
To ensure the relief in Topic 848 covered the period of time during which a significant number of modifications may take place, ASU No. 2020-04 deferred the sunset date of Topic 848 from Dec. 31, 2022, to Dec. 31, 2024, after which entities would no longer be permitted to apply the relief in Topic 848, the FASB said.
As of Oct. 1, 2024, no new LIBOR interest rates have been published.
During the FASB’s 2021 agenda consultation project and other outreach, stakeholders expressed concerns that, in certain circumstances, the current guidance for hedge accounting (Topic 815), which the FASB issued in 2017, increases the risk of not being able to apply hedge accounting for otherwise highly effective hedging relationships, which results in less decision-useful information for investors. Stakeholders also identified some areas of hedge accounting guidance requiring further updates to address the effects of reference rate reform on hedge accounting.
The FASB said the ASU issued today enables entities to apply hedge accounting to a greater number of highly effective economic hedges in the following five areas:
Foreign-currency-denominated debt instrument as hedging instrument and hedged item (dual hedge): The ASU eliminates the recognition and presentation mismatch related to a dual hedge strategy (that is, a hedge for which a foreign-currency-denominated debt instrument is both designated as the hedging instrument in a net investment hedge and designated as the hedged item in a fair value hedge of interest rate risk).
Similar risk assessment for cash flow hedges: The ASU expands the hedged risks permitted to be aggregated in a group of individual forecasted transactions, enabling entities to apply hedge accounting to potentially broader portfolios of forecasted transactions.
Hedging forecasted interest payments on choose-your-rate debt instruments: The ASU establishes a model that enables hedge accounting to be applied more broadly to choose-your-rate debt and address existing diversity in practice.
Cash flow hedges of nonfinancial forecasted transactions: The ASU expands hedge accounting for forecasted purchases and sales of nonfinancial assets subject to certain criteria.
Net written options as hedging instruments: The ASU accommodates differences in the loan and swap markets that resulted from reference rate reform, eliminating the requirement for the net written option test in certain instances.
For public business entities, the amendments in the ASU are effective for annual reporting periods beginning after Dec. 15, 2026, and interim periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted on any date on or after the issuance of the ASU.
[CPA Practice Advisor]
