United States

Transitioning away from LIBOR

FINANCIAL REPORTING INSIGHTS  | 

The London Interbank Offered Rate (LIBOR) is the most commonly used reference rate in the global financial market. However, it is expected that banks reporting information used to set LIBOR will stop doing so after 2021. Because of concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative rate for U.S. dollar LIBOR.

The phase out of LIBOR will impact many entities as it is commonly referenced in debt, investments, interest rate derivatives and other contracts. The FASB has a project on its agenda to address  accounting changes necessitated by reference rate reform. Recent tentative Board decisions included:

  • The scope of the project is contracts that reference LIBOR or an interest rate that has been discontinued or is anticipated to be discontinued
  • Critical term changes that are either essential to or related to the replacement of an interest rate would qualify for relief from:
    • The assessment to determine whether a modification to a loan or debt instrument is a troubled debt restructuring, modification or extinguishment in accordance with ASC 310-20, “Receivables—Nonrefundable Fees and Other Costs,” ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors”, ASC 470-50, “Debt—Modifications and Extinguishments” and ASC 470-60, “Debt—Troubled Debt Restructurings by Debtors”
    • The lease modification accounting requirements in accordance with ASC 842, “Leases”
    • The reassessment of embedded derivatives in accordance with ASC 815
  • For all other contract modifications, the Board decided to provide a principle that would allow such modifications to be considered a continuation of the contract for the purposes of the relevant Topic
  • The relief would be optional on a Topic-by-Topic basis

Hedge accounting relief and other matters will be discussed at a future Board meeting.

A recent SEC staff statement encourages market participants to identify existing contracts that extend past 2021 to determine their exposure to LIBOR, and to consider whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language. Among other matters, the statement also discusses how registrants might respond to risks associated with the discontinuation of LIBOR.