Understanding ASC 848

February 25, 2020 Chatham Financial

A summary of key issues companies need to know about the standard


On July 27, 2017, the Financial Conduct Authority (FCA), tasked with overseeing the London Interbank Offered Rate (LIBOR), announced the benchmark interest rate will be phased out by the end of 2021. As a result, existing and future contracts indexed to LIBOR will need to be renegotiated to reference another rate. The proposed replacement for USD-LIBOR is the Secured Overnight Financing Rate (SOFR); other alternative risk-free rates (RFRs) have been identified in the UK, Europe, Japan, and Switzerland. Reference rate reform will impact millions of contracts with trillions of aggregate notional value throughout the world. Companies find exposure to LIBOR not only in debt, leases, and derivatives, but also in the default provisions of purchase and sale contracts and other contracts. Additional information about the economic effects of reference rate reform can be found here.

In March 2020 the Financial Accounting Standards Board (FASB) is expected to issue a set of optional relief in ASC 848 Reference Rate Reform. The guidance contains optional expedients that can be applied to debt contracts, receivables, leases, derivatives, and other contracts impacted by reference rate reform.

Due to the number of complexities involved in this transition, it is imperative that companies assess their current and potential future exposure to LIBOR and actively plan for the transition. In addition to the economic and operational impact, this includes having discussions with auditors to ensure that the timing and content of documentation is sufficient. 

In addition, tax relief has been proposed by the U.S. Treasury for reference-rate-reform-related contract modifications. Companies should consult with tax counsel and advisors to evaluate the impacts.

What is ASC 848 Intended to Address?

ASC 848 will provide optional relief for contract modifications that are related to reference rate reform. When a contract is modified, current GAAP requires analysis to determine the ongoing treatment of the contract and the P&L impact associated with the modification. Additionally, unless they are renegotiated concurrently, derivatives and the contracts that they hedge could be renegotiated with different critical terms. In that scenario, application of ASC 848 would allow companies to ignore certain economic mismatches arising due to reference rate reform in a hedging relationship where current GAAP requires those mismatches be modeled into the assessment of effectiveness. This can all be done without changing the accounting treatment for the affected instruments and contracts if certain optional expedients within ASC 848 are elected.  

What happens when Topic 848 is issued?

ASC 848 is expected to be issued in March 2020 and be effective upon issuance. However, the provisions in ASC 848 are optional and must be elected individually for relief to be applied. Chatham recommends that companies review their individual facts and circumstances to ensure that election of relevant portions of the guidance is done in a timely manner and that appropriate disclosures are made in financial statements. While ASC 848 does not impose any new disclosure requirements, the SEC staff has requested additional disclosure regarding reference rate reform activities.

What elections might companies need to make now or in the near-term?

Companies that have cash flow hedging relationships should consider the optional expedients related to probability and effectiveness assessments. These expedients will allow companies to ignore the impact of reference rate reform in these forward-looking analyses until both the derivative and hedged transactions have completed the transition. Once companies begin to modify contracts, such as through adherence to the ISDA fallback protocol, these expedients will be necessary to preserve hedge accounting.

What elections will companies need to make in the future?

As companies begin to modify contracts, they should consider applying the optional expedients in ASC 848 that allow companies to avoid the quantitative modifications test in ASC 310, ASC 470, ASC 842, and the embedded derivative analysis in ASC 815. Note that the optional expedients in ASC 848 are only available for terms modified due to reference rate reform. Companies will need to analyze each contract amendment to determine whether it is in scope for the exceptions provided in ASC 848. Additionally, companies should consider the expedients that allow hedge accounting to continue even though the terms of the derivative have been modified, as well as the need to update valuation models as the risk-free discount rates migrate to RFRs over the course of reference rate reform.

What happens when companies no longer have exposure to reference rate reform?

ASC 848 is designed to provide relief while Companies are exposed to reference rate form, with a set expiration date of December 31, 2022. Exposure to reference rate reform is considered on a contract by contract, or relationship by relationship basis. For example, once an individual debt or lease contract transitions to a risk-free rate, that specific contract is no longer exposed to reference rate reform and thus no longer eligible for relief under ASC 848. For contracts in hedging relationships, exposure ends when both the hedge (or hedges) and the hedged item have been modified to reference a new rate. Companies will have access to the relief in ASC 848 until the earlier of the 2022 sunset date or the end of their exposure.

How can Chatham help?

Chatham has been following all aspects of reference rate reform from the beginning. Our team of accounting consultants, regulatory experts, and hedging advisors can help companies navigate the contract modifications and accounting analysis that will be key to success in this transition. Chatham can provide sample contract language, draft ASC 848 election memos, and advice to help companies make the right decision at the right time. Please feel free to contact your Hedge Accounting contact or Relationship Manager for more information.


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal/notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 20-0050

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