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    FASB Proposes Guidance to Assist in Transition to New Reference Rates

    September 05, 2019

    FASB proposed an Accounting Standards Update (topic 848) that would provide temporary optional guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The comment period for the proposed update ends on October 07, 2019. The guidance would apply only to contracts or hedging relationships that reference London Interbank Offer Rate (LIBOR) or another reference rate that is expected to be discontinued due to reference rate reform. The effective date would be the date of issuance of the final guidance. The guidance would not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.

    The guidance is intended to help stakeholders during the global market-wide reference rate transition period. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, which is the benchmark interest rate banks use to make short-term loans to each other. With global capital markets expected to move away from LIBOR and other interbank offered rates (IBORs) toward rates that are more observable or transaction-based and less susceptible to manipulation, FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition. This proposed Accounting Standards Update would provide optional expedients and exceptions for applying generally accepted accounting principles, or GAAP, to contract modifications and hedging relationships affected by the reference rate reform. An entity can elect to apply the proposed amendments as follows:

    • The optional expedients for contract modifications would be applied consistently for all contracts or transactions within the relevant Topic, Subtopic, or Industry Subtopic within the Codification that contains the guidance that otherwise would be required to be applied.
    • The optional expedients for hedging relationships would be elected on an individual hedging relationship basis.

    In response to concerns about structural risks of IBORs and particularly the risk of cessation of LIBOR, regulators worldwide have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The examples of reference rates undergoing reform include US LIBOR, GBP LIBOR, EURIBOR, CHF LIBOR, and JPY LIBOR. 

     

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    Keywords: Americas, US, Banking, Insurance, Securities, Accounting, Interest Rate Benchmark, Reference Rate Reform, LIBOR, IBORs, GAAP, Topic 848, FASB

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