FASB approved an Accounting Standards Update (Topic 848) to provide temporary, optional guidance to ease the potential burden in accounting for, or recognizing the effects of, the reference rate reform on financial reporting. FASB is expected to issue the final Accounting Standards Update in early 2020. The guidance will apply only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. This accounting relief could be applied until January 01, 2023, a year after the expected discontinuation of LIBOR.
The final Accounting Standards Update will provide optional expedients and exceptions for applying the Generally Accepted Accounting Principles, or GAAP, to contract modifications and hedge accounting relationships affected by the reference rate reform, thus facilitating a smoother transition to new reference rates. The final Update will assist stakeholders during the global market-wide reference rate transition period. Therefore, the guidance would be in effect for a limited time. The guidance would be effective once the final Accounting Standards Update is issued and would not apply to contract modifications made and hedging relationships entered into, or evaluated, after December 31, 2022.
With global capital markets expected to move away from LIBOR and other interbank offered rates toward rates that are more observable or transaction-based and less susceptible to manipulation, FASB launched a project in mid-2018 to address potential accounting challenges expected to arise from the transition. 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 provision applies to loans, debt, leases, and other arrangements. A company or other organization would be permitted to preserve its hedge accounting when updating its hedging strategies in response to the reference rate reform.
Keywords: Americas, US, Banking, Insurance, Securities, Accounting, Interest Rate Benchmark, Reference Rate Reform, GAAP, Topic 848, LIBOR, IBORs, FASB
Previous ArticleBaFin Updates Notes on Reporting Under Solvency II
The European Commission (EC) published the Delegated Regulation 2021/1527 with regard to the regulatory technical standards for the contractual recognition of write down and conversion powers.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to provide guidance to authorized deposit-taking institutions on the interpretation of APS 120, the prudential standard on securitization.
The Single Resolution Board (SRB) published a Communication on the application of regulatory technical standard provisions on prior permission for reducing eligible liabilities instruments as of January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published a new set of frequently asked questions (FAQs) to clarify the regulatory capital treatment of investments in the overseas deposit-taking and insurance subsidiaries.
The European Banking Authority (EBA) published the final report on the guidelines specifying the criteria to assess the exceptional cases when institutions exceed the large exposure limits and the time and measures needed for institutions to return to compliance.
The Prudential Regulation Authority (PRA) issued the policy statement PS20/21, which contains final rules for the application of existing consolidated prudential requirements to financial holding companies and mixed financial holding companies.
The European Banking Authority (EBA) revised the guidelines on stress tests to be conducted by the national deposit guarantee schemes under the Deposit Guarantee Schemes Directive (DGSD).
The European Commission (EC) announced that Nordea Bank has signed a guarantee agreement with the European Investment Bank (EIB) Group to support the sustainable transformation of businesses in the Nordics.
The Hong Kong Monetary Authority (HKMA) issued a circular, for all authorized institutions, to confirm its support of an information note that sets out various options available in the loan market for replacing USD LIBOR with the Secured Overnight Financing Rate (SOFR).
The Office of the Comptroller of the Currency (OCC) issued a new "Problem Bank Supervision" booklet of the Comptroller's Handbook. The booklet covers information on timely identification and rehabilitation of problem banks and their advanced supervision, enforcement, and resolution when conditions warrant.