The Financial Accounting Standards Board released a
The guidance aims to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting as banks make the transition from LIBOR. Regulators began pushing for banks to move away from LIBOR after a scandal erupted in 2012 over reports of conversations between traders from some of the major banks showing how the rate can be manipulated to make investment gains. FASB has been working on ways to help accountants make the transition from LIBOR to the Secured Overnight Financing Rate (SOFR), and in June it advanced an initiative to offer accounting relief for companies and organizations that need to modify their contracts (see
“The FASB is committed to providing 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 Golden in a statement. “The board’s proposal will address operational challenges they have raised and ultimately help simplify the process while reducing related costs.”
FASB noted that trillions of dollars in loans, derivatives and other financial contracts reference LIBOR. Global capital markets are expected to transition away from LIBOR and other interbank offered rates toward rates that are more observable or transaction-based and less susceptible to manipulation. FASB launched a project in late 2018 to deal with the potential accounting challenges anticipated to come with the transition.
The proposed accounting standards update would offer some optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships affected by the reference rate reform. FASB’s guidance would apply only to contracts or hedging relationships that reference LIBOR or another reference rate that’s expected to be discontinued due to reference rate reform.
The guidance aims to help stakeholders during the global market-wide reference rate transition period, so it would be in effect for just a limited time after the final guidance is issued by FASB. It wouldn’t apply to contract modifications made and hedging relationships entered into or evaluated after Dec. 31, 2022.
FASB is asking stakeholders to review and provide comments on the proposed update by Oct. 7, 2019. The