Accounting group issues temporary guidance for moving away from LIBOR to other reference rates

Temporary, optional accounting guidance to ease the potential burden in accounting for or recognizing the effects of reform of reference rates for interbank short-term loans was released Wednesday by the accounting industry’s standards group.

The Financial Accounting Standards Board (FASB) said it issued the temporary guidance (which it expects to make final in early 2020) to provide stakeholders with guidance they need to ease the process of migrating away from the London Interbank Offered Rate (LIBOR) to new, replacement reference rates, such as the Secured Overnight Financing Rate (SOFR). The finalized guidance, FASB said, will address stakeholders’ operational challenges, help simplify the migration process, and reduce related costs.

According to FASB, trillions of dollars in loans, derivatives, and other financial contracts reference the existing LIBOR, which is expected to be phased out after 2021.

FASB said its final guidance (issued as an Accounting Standards Update, or ASU) will provide “optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedge accounting relationships affected by reference rate reform, facilitating a smoother transition to new reference rates.”

The standards group said that for a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This provision applies to loans, debt, leases, and other arrangements, FASB said.

“A company or other organization would be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform,” FASB said.

The accounting standards group said the guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

FASB reference rate reform