The FASB plans to issue final rules either later this year or the first quarter of 2020 to facilitate the effects of rate reform, its work to prevent an accounting impediment to companies transitioning away from the London Interbank Offered Rate (LIBOR) to new rates. The board’s timeline is so its changes can be issued in tandem with the International Swaps and Derivatives Associations’ amendments to its definitions, expected near year-end, according to July 23 discussions by the FASB and IASB in London.
The FASB plans to issue final rules either later this year or the first quarter of 2020 to facilitate the effects of rate reform, its work to prevent an accounting impediment to companies transitioning away from the London Interbank Offered Rate (LIBOR) to new rates.
The board’s timeline is so its changes can be issued in tandem with the International Swaps and Derivatives Associations’ (ISDA) amendments to its definitions, according to July 23, 2019, discussions by the FASB and the IASB in London.
The ISDA is expected to finalize amendments to its 2006 definitions and protocol near the end of this year.
LIBOR is being phased out by 2021 and therefore there is a global move for companies to shift to a more transactional or observable reference rate. The topic affects trillions of dollars of loans, derivatives, and financial contracts tied to LIBOR and therefore it poses a major undertaking for impacted companies.
Accountants have told the FASB that once the ISDA rules are finalized, they will begin to modify their contracts, and therefore the board wants to have its rules in place to facilitate their work, a FASB senior staff accountant told the boards.
The FASB plans to issue a proposal by September to solicit public feedback on its tentative changes. (See Banks, Others to Get Proposal by September Tackling Effects of LIBOR Phaseout on Financial Reporting in the July 19, 2019, edition of Accounting & Compliance Alert.)
The proposal is aimed at reducing cost and complexity out of the accounting work, providing relief that does not waive the accounting analysis, but would remove the operational complexity around modifying contracts with LIBOR references.
The changes are optional and will have a January 1, 2023 expiration date, the board said. The topic, however, will be continually monitored by the FASB.
IASB members expressed interest in how the FASB reached its views on contract modifications and hedge accounting. The board’s decision, for example, to allow contract modification on a topic-by-topic basis. “If you’ve got loans would you be making effectively a decision on whether you want to apply the modification relief for all your loans but might make a different decision for bonds?” IASB Vice Chair Sue Lloyd asked.
“Yes, technically bonds are a different topic [in the GAAP literature],” a FASB staff accountant said.
Lloyd also asked about the FASB’s decision related to hedge accounting that companies can apply the change on a hedge-by-hedge basis. The IASB has said it would make its rules mandatory so that companies would not make the choice on a hedge-by-hedge basis. “That was because we were concerned people might cherry pick when they wanted to recycle accumulated gains and losses out of OCI into P&L and to get particular effect—so I guess I would be interested in how you thought about that,” Lloyd said.
The FASB’s decision stemmed from not wanting to want to change what companies are currently doing, according to the discussions. Currently, companies under U.S. GAAP can always elect to discontinue a hedge relationship on a hedge-by-hedge basis, and the board did not want to introduce a different way of locking people into their hedges.
“The board haven’t seen cherry picking with that today,” FASB Vice Chairman James Kroeker explained. “Certainly the ability to cherry pick is out there, but companies aren’t doing it,” he said.
The FASB proposal would apply to any contract that references LIBOR or another interbank offered rate (IBOR) that is going away.
After identifying which contracts would be within the scope of the rules, a company would look at how the rate removal changes the contract by zeroing in on “critical terms.” Terms, for example, that affect the calculation of cash flows and the timing and amount of cash flows.
The proposal will split the accounting relief into two buckets: contract modifications whereby the quantitative work that could be burdensome for a large volume of transactions would be replaced with a more qualitative assessment, and hedge accounting whereby the accounting evaluation would be changed.
To transition the rules, the guidance would be effective on a prospective basis. If a company elects the relief, it would disclose what areas it elected for the relief as well as the reasons for making the election.
The FASB is further along with its rate reform work than the IASB, which is moving to wrap up the first phase of its efforts. (See Meeting Added to Expedite Rate Reform Proposal in the July 17, 2019, edition of Accounting & Compliance Alert.)
Most respondents support the IASB’s proposals subject to draft or clarifications, an IASB staff accountant said during the meeting. If finalized, the IASB rules would be effective January 1, 2020.
