By Denise Lugo
FASB Chairman Russell Golden said the board in coming weeks will issue new accounting guidance to help companies transition away from the London Interbank Offered Rate (LIBOR), remarks that shore up expectations of the rules’ release though almost half the board plans to dissent. In November, the standard was cleared for issuance by 4 to 3 board vote.
“I’m happy to say that all the ballots are in, the votes are there, and we will be issuing this in the next couple of weeks,” Golden said at the February 25, 2020, meeting of the Financial Accounting Foundation (FAF), trustees of the FASB and GASB.
A FASB spokesperson placed the timeline for the issuance of the final standard at about mid-March with the caveat that it could be subject to change.
There are trillions of dollars of loans, derivatives, and financial contracts that are tied to LIBOR, and therefore current U.S. GAAP cannot support the massive amount of contracts that will need to be fixed by financial institutions. The FASB and other standard-setters worldwide have been scrambling to prevent global chaos from the financial reporting system by developing a simpler path to transition rate reform. The IASB, the FASB’s international counterpart, is working on a set of rules for IFRS filers.
The FASB in September 2019 issued Proposed Accounting Standards Update (ASU) No. 2019-770, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, changes that will enable companies to avoid having to use costly and complex approaches to modify contracts when replacing extinct reference rates.
FASB members Harold Schroeder, Gary Buesser, and Christine Botosan in November said they would write dissents over concerns investors would not be provided with sufficient information to enable them to understand current holdings affected by reference rate reform and the effects of hedge accounting expedients. FASB members in favor of moving ahead with finalizing the proposal—Chairman Russell Golden, Vice Chairman James Kroeker, and board members Marsha Hunt and Susan Cosper—said the SEC’s Division of Corporation Finance’s July 2019 statement on LIBOR transition already stipulated the “at issue” disclosures that would provide investors with the information they needed.
The forthcoming rule changes will allow companies to preserve the hedging strategies they have set up, according to board discussions last year. The changes simplify the accounting evaluation of a contract modification and allow for that modification to be considered a continuation of the contract for accounting purposes. This accounting relief can be applied to loans, debts, leases, or any other type of contracts affected by reference rate reform.
The guidance would also simplify the assessment of hedge effectiveness and allow hedging relationships affected by reference rate reform to continue. The accounting rules end December 31, 2022.
In the U.S., the Federal Reserve identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate to LIBOR.
This article originally appeared in the February 26, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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