A GASB update to accounting rules that address the dissolution of the London Interbank Offered Rate (LIBOR) will be published in the Spring for state and local governments.
The updates, proposed last year as part of an omnibus package of accounting changes, is currently scheduled to be considered for approval at the April 2022 board meeting, a GASB spokesperson said on January 13, 2022.
The proposed update stems from decisions last year by LIBOR’s administrator, the ICE Benchmark Administration (IBA), to extend the publication of the most widely used United States Dollar (USD) LIBOR tenors by 18 months to June 30, 2023.
The proposal would tie accounting workarounds that facilitate the effects of rate reform to LIBOR as opposed to a sunset date. This would enable governments to continue to use hedge accounting for derivatives that reference LIBOR if the rate continues to be measured and reported as of the original deadline.
“Instead of keying it to that date as we did in Statement 93 and possibly setting us up to have to come back and do it again, we worded the amended deadline to be keyed to LIBOR as long as it continues to be propagated using the methodology that was in place as of the original deadline,” said Dean Mead, GASB Assistant Director of Research and Technical Activities, on January 14.
“We were trying to do two things – make it so if they did extend it and continue to report LIBOR as its calculated now, we wouldn’t have to open up Statement 93 again to extend the deadline,” he said. “And we’d ensure that if something continues to exist that’s called LIBOR, but is calculated in a different manner from the way it is now, that our sunset will still happen as of June 30, 2023, if that’s when LIBOR as it exists right now ceases to be reported.”
There has been much talk about the possibility that the IBA will continue to publish LIBOR using a different methodology, sometimes referred to as synthetic LIBOR, after the June 30, 2023, deadline.
“And whatever that form is we know it’s not going to be acceptable under our standards, so we wanted to preclude that possibility as well,” Mead said. “In proposing this new deadline we wanted to make sure that the board didn’t have to come back and do this a third time – and we also wanted to address the possibility that something called LIBOR might continue to exist beyond June 30, 2023.”
GASB as have other accounting standard-setters in 2020 worked to provide an accounting workaround to facilitate the effects of rate reform brought on by a global scandal that has resulted in LIBOR being phased out.
Specifically, the board in March 2020 issued GASB Statement (GASBS) No. 93, Replacement of Interbank Offered Rates, to amend GASBS No. 53, Accounting and Financial Reporting for Derivative Instruments.
When Statement 93 was issued, LIBOR was expected to cease to exist after December 31, 2021. The board said it therefore chose that date as the date after which LIBOR would no longer be an appropriate benchmark interest rate for a derivative instrument that hedges the interest rate risk of taxable debt.
Based on the IBA’s announcement, the GASB in 2021 considered the need to extend the period during which LIBOR is considered an appropriate benchmark interest rate.
As a result, the updates were proposed in July 2021 under GASB Exposure Draft (ED) No. 37-1, Omnibus 20XX, for the public’s comment.
This article originally appeared in the January 18, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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