FASB Advances Toward Easing Accounting Burden for Libor Phaseout
June 19 2019 - 2:38PM
Dow Jones News
By Tatyana Shumsky
The Financial Accounting Standards Board on Wednesday took a
major step toward removing a potentially costly accounting burden
facing companies and organizations affected by global reference
rate reforms, including a planned shift away from the London
interbank offered rate.
FASB, which sets U.S. accounting standards, tentatively decided
that changes in a contract's reference rate, such as Libor, would
be accounted for as a continuation of that contract, provided it
met certain criteria.
As a result, many companies won't need to go through a complex
evaluation process or costly administrative adjustments to change
how they account for the shift to a new reference rate, such as the
Secured Overnight Financing Rate, which is the benchmark preferred
by the Federal Reserve.
Companies currently must assess whether a contract modification
such as shifting to a new reference rate will change future cash
flows of that contract by 10% or more, and, in that case, account
for it as if it were a new contract.
The board's decision would apply to loans, debt, leases and
other arrangements. It must still be incorporated in a proposal to
amend existing rules, which would undergo a public comment period
before being finalized and approved. FASB expects to change the
rule in time for the transition away from the Libor at the end of
2021.
Libor underpins an estimated $200 trillion of transactions,
including short-term loans, derivatives and other contracts. But
after a series of market-rigging scandals, global financial
regulators moved to phase out the benchmark as part of wider
reforms.
FASB's decision is part of a series of deliberations planned by
the board to examine how accounting standards need to change to
accommodate the transition away from Libor. The project is expected
to culminate in several modifications to U.S. accounting
standards.
"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," FASB Chairman Russell G.
Golden said in a statement.
The FASB last year added SOFR to its list of interest rates
permitted for the application of hedge accounting.
As the deadline for Libor's phaseout draws closer, companies
have started to share with investors some of the potential fallout
from moving to a new interest rate benchmark. These include a
potential jump in borrowing costs and challenges around hedging
interest and currency rate risk, among others.
And while some companies have sold SOFR-linked debt, the pace of
adoption has been slow as companies wait for the market around the
new tool to be developed further.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
(END) Dow Jones Newswires
June 19, 2019 14:23 ET (18:23 GMT)
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