FASB proposes to extend LIBOR to SOFR reference rate reform relief

The Financial Accounting Standards Board issued a proposed accounting standards update Wednesday that would give preparers more time to use its earlier reference rate reform relief guidance and expand the Secured Overnight Financing Rate (SOFR)-based interest rates available as benchmark interest rates.

Financial regulators have been trying to move away from the traditional London Interbank Offered Rate, or LIBOR, as it was found to be prone to manipulation by traders at major banks. The markets are scheduled to move to SOFR instead, and FASB has been working on updating its accounting standards to smooth the transition. However, some banks need more time to make the adjustment.

In 2020, FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The document offers optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.

Courtesy of GASB

The goal of the 2020 guidance was to provide relief during the temporary transition period, so FASB included a sunset provision within it based on its expectation of when LIBOR would stop being published. However, last year, the U.K. Financial Conduct Authority (FCA) delayed the original end date of certain parts of USD LIBOR until June 30, 2023.

To ensure the relief provided by FASB back in 2020 covers the period of time during which a significant number of modifications may take place, the amendments in the proposal unveiled Wednesday would postpone the sunset date from Dec. 31, 2022, until Dec. 31, 2024, after which entities would no longer be permitted to apply the relief in Topic 848.

In a related matter, in 2018, FASB issued Accounting Standards Update No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which added the term Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate (SOFR Swap Rate) to the Master Glossary of the FASB Accounting Standards Codification®. The amendments in Update 2018-16 also allowed a rate that meets the definition of the SOFR Swap Rate to be considered a benchmark interest rate and thus eligible to be designated as the hedged risk for recognized fixed-rate financial instruments or a forecasted issuance or purchase of fixed-rate financial instruments.

In Update 2018-16, FASB said the definition of the SOFR Swap Rate was specific to the OIS rate based on SOFR and added that it would monitor the developments of the forward-looking, term-based version of the SOFR rate (SOFR term) and consider including SOFR term as a benchmark interest rate in the future. Based on the developments of SOFR term in the marketplace, the proposed update would amend the definition of the SOFR Swap Rate to include other versions of SOFR, such as SOFR term, as a benchmark interest rate under Topic 815.

FASB is asking stakeholders to review and provide feedback on the proposed update by June 6, 2022.