United States

Proposed accounting guidance for the effects of reference rate reform

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update (ASU), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. If finalized, the proposed ASU would provide guidance on how entities should account for changes to certain contracts, hedging relationships and other transactions affected by reference rate reform, including the planned discontinuation of the London Interbank Offered Rate (LIBOR). LIBOR is commonly referenced in loans, debt instruments, leases and interest rate derivatives.

The guidance in the proposed ASU would provide optional expedients to existing guidance on how to account for certain contract modifications involving the replacement of LIBOR or another reference rate affected by reference rate reform. For example, if a debt instrument is modified in conjunction with the discontinuation of LIBOR to refer to a different reference rate, the modification would be accounted for on a prospective basis by adjusting the effective interest rate. In other words, it would not be necessary to perform an analysis to determine if the modification should be accounted for as a modification or extinguishment. Similarly, modifications to leases and certain other contracts due to reference rate reform would be accounted for as a continuation of those contracts with no requirement to reassess previous determinations.    

The guidance in the proposed ASU would also promote the continued application of hedge accounting for hedge relationships that are impacted by reference rate reform yet remain highly effective.

If finalized, the proposed amendments would be effective upon the issuance of a final ASU and would be effective only until December 31, 2022, which is a year after the date that LIBOR is expected to be discontinued. As such, finalized guidance would apply to: (a) contract modifications made between the effective date of the final ASU and December 31, 2022, and (b) hedging relationships in existence on or after the adoption date of the final ASU and hedging relationships entered into through December 31, 2022.

The proposed ASU is available for comment until October 7, 2019.