FASB Issues Guidance for LIBOR Transition

The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update that provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.

“This new ASU provides stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates,” said FASB Chairman Russell G. Golden. “It addresses operational challenges stakeholders raised with the Board and will help simplify matters going forward. At the same time, the new guidance will also help reduce transition-related costs,” he added.

LIBOR and other interbank offered rates are widely used benchmark or reference rates in the United States and globally. 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 broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022.

The ASU, along with a “FASB in Focus” overview, is available at fasb.org.

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