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Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments

Jillian Pearce
Professional Accounting Fellow, Office of the Chief Accountant

Washington D.C.

Dec. 7, 2020

The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author’s views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the staff.


Good afternoon. It is an honor to speak with you today. I would like to share a few OCA staff observations related to two topics: (i) the expected discontinuation of LIBOR[1] and (ii) the principal versus agent guidance within the revenue standard.[2]

Expected discontinuation of LIBOR - Evaluating interest rate reset features

Last year at this conference, an OCA staff member discussed the expected discontinuation of LIBOR, encouraging stakeholders to continue to evaluate their exposure to LIBOR-based contracts and to raise accounting considerations as they prepare for the transition to alternative reference rates.[3] Consider a fact pattern presented to OCA staff relating to whether certain interest rate reset features based on the Secured Overnight Financing Rate (“SOFR”) meet the definition of an embedded derivative[4] that requires bifurcation and separate accounting.

In this fact pattern, the entity evaluated four SOFR-based interest rate reset conventions:

  • Term SOFR,
  • Compounded SOFR “in-arrears,”
  • Compounded SOFR “in-advance,” and
  • Average SOFR “in-advance.”

The entity assessed whether these features represent terms of the host debt contract. If these features were not considered terms of the host debt contract, entities would be required to evaluate certain conditions within the embedded derivative guidance.[5] In supporting its view that these features represent terms of the host debt contract, the entity considered certain unique factors associated with these new interest rate reset features, including:

  1. The purpose of these SOFR interest-rate features is to provide a market based solution to the discontinuation of LIBOR;
  2. These features are not meant to provide leveraged returns to investors, nor are the counterparties seeking to add complex basis swaps; and
  3. Certain of these reset features will be required for specific lending products due to consumer protection laws that require lenders and servicers to provide advance notice of interest rate changes to borrowers.

In asserting that these interest rate reset features were part of the host debt contract, the entity believed it was reasonable to conclude that each of the features represents a normal market convention. The entity noted that if the features were not considered normal market conventions, and therefore were not considered part of the host debt contract, there could be certain situations in which the conditions of the embedded derivatives guidance commonly referred to as the “double-double” test would be met.[6] That is, the interest rate could be at least twice the initial rate of return and also more than two times the current market rate. As this “double-double test” guidance must be applied without regard to the probability of certain circumstances occurring, a conclusion that these interest rate conventions are not normal market conventions could result in bifurcation and separate accounting.

OCA staff did not object to the entity’s view that the SOFR interest rate reset features evaluated in the consultation were terms of the host contract and did not represent embedded derivatives that required further assessment of bifurcation under the embedded derivatives guidance.

The OCA staff conclusion was based on current expectations of how markets for commercial and consumer based SOFR products will develop. As markets continue to develop and changes in facts or circumstances occur, entities will need to evaluate any new interest rate features.

Principal versus agent guidance

Moving to my second topic – each year OCA receives a number of questions related to application of the principal versus agent guidance[7] in the revenue standard. Earlier, you heard Geoff Griffin[8] discuss one principal versus agent fact pattern, and now I would like to share observations on a fact pattern involving a registrant that produces and sells a commodity to its customers. In this fact pattern, the registrant had the contractual right to market and sell 100 percent of the commodity produced by a related party.

The registrant determined how to source the commodity to fulfill its contracts with customers – either from its own production, from production from the related party facility, or from a third party. This raises the issue of whether the registrant was acting as a principal or an agent in selling the commodity produced by the related party. If the registrant sourced the product from the related party facility, the registrant took possession and legal title of the product and transported it to the customer. The registrant had the right to redirect the product to different customers during transportation, subject to certain geographic restrictions, but the registrant believed inventory risk was mitigated by an insurance policy that covered risk of damage or loss. The selling price of the commodity was generally determined based on the market price of the product at the time of delivery. For product sourced from the related party facility, the registrant received payment from the end customer and remitted payment to the producer, less a fixed percentage commission that the registrant retained.

The registrant proposed to account for the commodity sales from this producer on a net basis, as it determined it was acting as an agent in the sale of the commodity from the producer and did not believe it controlled the product. The registrant evaluated the indicators of control outlined within the revenue standard.[9] While it did not believe any of the indicators were determinative, the registrant ultimately concluded it was an agent in the transaction as it did not receive substantially all of the benefits from the sale of the commodity as a result of its fixed percentage commission.

OCA staff objected to the registrant’s conclusion that it did not have the right to direct the use of and obtain substantially all of the remaining benefits of the product from the producer, and therefore concluded the registrant was the principal in the transaction based on the total mix of information presented.

Thank you for the opportunity to speak with you today.

[1] Formerly an acronym for the London Interbank Offered Rate, LIBOR is common parlance for its current official name ICE LIBOR.

[2] Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

[3] See Jamie N. Davis, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2019 AICPA Conference on Current SEC and PCAOB Developments (Dec. 9, 2019), available at

[4] See ASC 815-15-25-26.

[5] See ASC 815-15-25-26(b).

[6] Id.

[7] See ASC 606-10-55-36 to 55-40.

[8] See Geoff Griffin, Professional Accounting Fellow, Office of the Chief Accountant, U.S. Securities and Exchange Commission, Remarks before the 2020 AICPA Conference on Current SEC and PCAOB Developments (Dec. 7, 2020), available at

[9] See ASC 606-10-55-39.

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