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FASB Issues Two-Year Extension on Accounting Rules that Facilitate Shift from LIBOR

December 22, 2022

The FASB on Dec. 21, 2022, published a two-year extension of temporary accounting relief guidance to continue to ease the way for companies to shift from the use of the London Interbank Offered Rate (LIBOR), which is being phased out due to a rate fixing scandal that was made public about a decade ago.

The board issued Accounting Standards Update (ASU) No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to extend the temporary accounting rules under Topic 848 from Dec. 31, 2022, to Dec. 31, 2024, for the shift from LIBOR when that and other rates expire.

The change aligns Topic 848, Reference Rate Reform, with the expected cessation date of USD LIBOR, which was postponed by administrators last year to June 30, 2023, a year after the sunset date of the reference rate accounting rules.

One-month and three-month tenors of USD LIBOR are the most widely used within the financial system and to leave the date unchanged would preclude a significant number of contracts from applying the easier accounting option in Topic 848, the board said.

The change is effective immediately and should be applied prospectively.

The extension comes at a time when trading volume has been increasing and more companies have been refinancing to the Secured Overnight Financing Rate (SOFR), a broad measure of the cost of borrowing cash overnight collateralized by treasury securities.

“SOFR trading volume is increasing,” Brittany Jervis, accounting advisory at Chatham Financial, said. “Especially in the U.S., when companies are refinancing, they are not refinancing to LIBOR anymore,” she said. “They’re now hedging based on those Term SOFR and Daily SOFR indexes, which is providing more and more liquidity in the market, so we’re certainly seeing that shift away from LIBOR.”

The FASB extension means that businesses can continue to avoid the cost and complexity of rules under Topic 815, Derivatives and Hedging, and assessing this index as they shift away from LIBOR to other rates.

Further, it allows them to ignore accounting mismatches that ensues during the rate transition period, said Jervis. “And it allows them to continue a previously perfectly effective hedging relationship until both the debt and the derivatives are transitioned to a new reference rate,” she said.

Treasury and accounting must keep in mind, however, that ASC 848 protection does not extend to debt and derivatives that fall back to SOFR, Jervis added. “For those who adopt the standard fallback language, the debt will likely transition to Term SOFR, while the hedges transition to Daily Simple SOFR, creating an economic mismatch between the two.”

The discontinuation of LIBOR was announced in July 2017, after bankers at a number of financial institutions moved to manipulate LIBOR to make profit. The scheme came to light in 2012. LIBOR, a daily calculation, is supposed to purport interest rate figures that banks pay to borrow money from each other. It is also used by banks to determine what rates to charge on various types of loans.

Topic 848 was developed as there are trillions of dollars of loans, derivatives, and financial contracts that are tied to LIBOR and U.S. GAAP could not support the massive amount of contracts that needed to be fixed by financial institutions.

The FASB and other standard-setters worldwide developed the optional and temporary accounting relief with the goal of preventing global chaos from the financial reporting system by developing a simpler path to transition rate reform.

The new Dec. 21 rule is a narrower version of a FASB proposal which was issued in April to solicit public comment. (See FASB Won’t Touch SOFR Definition, Guts Narrow Rate Reform Proposal in the Oct. 6, 2022, edition of Accounting & Compliance Alert.)

[Thomson Reuters]

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