FASB Approves Finalization of Guidelines for LIBOR Transition

The Financial Accounting Standards Board (FASB) approved an accounting standards update (ASU) to provide temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.

The board is expected to issue a final ASU in early 2020.

“After weighing significant input and feedback, the FASB has approved finalizing guidance to provide stakeholders with guidance they need to ease the process of migrating away from LIBOR to new reference rates,” said FASB Chairman Russell G. Golden. “The guidance will be issued early next year and will address stakeholders’ operational challenges, help simplify the migration process, and reduce related costs,” he added.

Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other.

With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction-based and less susceptible to manipulation, the FASB launched a project in mid-2018 to address potential accounting challenges expected to arise from the transition.

The final ASU will provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedge accounting relationships affected by reference rate reform, facilitating a smoother transition to new reference rates.

For a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements.

A company or other organization would be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform.

The guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

The final ASU is intended to assist stakeholders during the global market-wide reference rate transition period. Therefore, the guidance would be in effect for a limited time. That is, the guidance would be effective upon issuance of final guidance and would not apply to contract modifications made and hedging relationships entered or evaluated after December 31, 2022.

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