FASB approves guidance to assist in reference rate transition

By Ken Tysiac

The transition from interbank-offered rates to new reference rates may get easier for companies as a result of temporary, optional accounting guidance approved Wednesday by FASB.

FASB launched a project in 2018 as a result of the expected move of global capital markets away from interbank-offered rates such as the London Interbank Offered Rate (LIBOR), which many banks have used as the benchmark interest rate to make short-term loans to one another.

LIBOR is expected to cease in its current form in 2021, and this will result in the use of new benchmarks such as transaction-based rates, which are considered to be less vulnerable to manipulation.

FASB on Wednesday approved temporary, optional guidance designed 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 Accounting Standards Update in early 2020 to address the issue.

The standard will provide optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting relationships affected by reference rate reform. These expedients and exceptions are designed to facilitate a smoother transition to new reference rates.

Under the approved guidance, a change in the reference rate for a contract that meets certain criteria will be accounted for as a continuation of that contract rather than the creation of a new contract. This provision will apply to loans, debt, leases, and other arrangements.

An organization also will be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform.

The new guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another rate that is expected to be discontinued as a result of reference rate reform. The guidance will be in effect for a limited time because it is designed only to address the fallout from reference rate reform. The standard will take effect upon its issuance and will not apply to contract modifications made and hedging relationships entered or evaluated after Dec. 31, 2022.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.

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