United States

GASB issues guidance for transition from Interbank Offered Rates

FINANCIAL REPORTING INSIGHTS  | 

Some governments have entered into agreements in which variable payments made or received depend on an interbank offered rate (IBOR)—most notably, the London Interbank Offered Rate (LIBOR). As a result of global reference rate reform, LIBOR is expected to cease to exist in its current form at the end of 2021, prompting governments to amend or replace financial instruments tied to LIBOR.

The Governmental Accounting Standards Board (GASB) recently issued Statement No. 93, Replacement of Interbank Offered Rates, to address accounting and financial reporting implications that result from the replacement of an IBOR. GASB Statement No. 93 includes the following amendments, among others:

  • Provides exceptions for certain hedging derivative instruments to the hedge accounting termination provisions when an IBOR is replaced as the reference rate of the hedging derivative instrument’s variable payment
  • Clarifies the hedge accounting termination provisions when a hedged item is amended to replace the reference rate
  • Clarifies that the uncertainty related to the continued availability of IBORs does not, by itself, affect the assessment of whether the occurrence of a hedged expected transaction is probable
  • Removes LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap
  • Identifies the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates for the qualitative evaluation of the effectiveness of an interest rate swap
  • Provides an exception to the lease modifications guidance in Statement No. 87, Leases, as amended, for certain lease contracts that are amended solely to replace an IBOR as the rate upon which variable payments depend

The removal of LIBOR as an appropriate benchmark interest rate is effective for reporting periods ending after December 31, 2021. All other requirements are effective for reporting periods beginning after June 15, 2020. Earlier application is encouraged.

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