The Financial Accounting Standards Board (FASB) has taken a major step towards approving accounting relief for companies and organizations required to modify contracts as a result of new global reference rates.
FASB has tentatively decided that for a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This decision applies to loans, debt, leases, and other arrangements.
“Reference rate reform is a top priority for the Board, and we’re committed to ensuring standards help stakeholders successfully adapt to the changes ahead,” said FASB chairman Russell G. Golden. “Today’s decisions will ease, from an accounting standpoint, the transition to a new reference rate for all organizations, thereby reducing accounting cost and complexity.”
Currently, trillions of dollars in loans, derivatives, and other financial contracts reference the London Interbank Offered Rate (LIBOR), the benchmark interest rate banks use to make short-terms loans to each other. Consequently, their related cash flows are tied to that rate.
With global capital markets expected to move away from LIBOR towards more transaction-based reference rates, the FASB launched a broad project to address potential accounting concerns expected to arise from the transition. Additionally, in late 2018, the FASB added the secured overnight financing rate—or SOFR—as a permissible benchmark rate for hedge accounting purposes.
The FASB will discuss other hedging-specific reference rate issues at a public meeting in July.