United States

Proposal addresses replacement of 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 to replace LIBOR with other reference rates.

Currently, Governmental Accounting Standards Board (GASB) Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires a government that renegotiates or amends a critical term of a hedging derivative instrument, such as the reference rate of a hedging derivative instrument’s variable payment, to terminate hedge accounting. Also, replacement of the rate on which variable payments depend in a lease contract would require, under Statement No. 87, Leases, that a government apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable.

The GASB recently issued an Exposure Draft, Replacement of Interbank Offered Rates, to address accounting and financial reporting implications that result from the replacement of an IBOR. Proposed amendments include the following, among others:

  • Providing an exception 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
  • Clarifying the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item
  • Clarifying that the uncertainty related to the continued availability of IBORs does not, by itself, affect the assessment of whether a hedged expected transaction is probable
  • Removing LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap
  • Identifying 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
  • Providing an exception to the lease modifications guidance in Statement 87 for certain lease contracts that are amended to replace an IBOR as the rate upon which variable payments depend

The proposed removal of LIBOR as an appropriate benchmark interest rate would be effective for reporting periods beginning after December 15, 2020. All other proposed requirements would be effective for reporting periods beginning after June 15, 2020. Earlier application would be encouraged.

The Exposure Draft is available for comment until November 27, 2019.