FASB 'Tentatively' Offers Reference Rate Reform Relief

Chris Gaetano
Published Date:
Jun 20, 2019

The Financial Accounting Standards Board (FASB) has "tentatively" approved relief for those affected by changes in reference rates following the phase-out of the London Interbank Offered Rate (LIBOR).

The LIBOR is the benchmark interest rate that is most widely used by financial institutions when making short-term loans to each other in the international market. It serves as a globally accepted key benchmark interest rate that indicates how much it costs to the banks to borrow from each other. However, the rate became suspect during the financial crisis when it was found that, for years, currency brokers at major banks had been coordinating with each other over instant messaging to fix the rates in order to boost profits and obscure financial difficulties. The scandal rocked the LIBOR's previously sterling reputation as a reliable rate. In the wake of the scandal, the United Kingdom's Financial Conduct Authority, its chief financial regulator, said that the rate is no longer tenable and so would phase out its use by 2021. 

Since the scandal, a number of alternatives have been developed, such as the U.S. Federal Reserve's Secured Overnight Financing Rate (SOFR) but none has gained the market traction that LIBOR had. This leaves many open questions on the part of every major player connected to the financial system that had used the LIBOR as a benchmark. For example, loans that had previously based their rates on the LIBOR may need to be renegotiated, as a new benchmark will likely produce different financial conditions that must be considered. Similarly, U.S. GAAP rules on debt modifications call for a new contract if the terms change to the point that it could be considered a new agreement, which could happen if the lender, which had previously based terms on the LIBOR rate, now uses another metric. 

In response to these concerns, the FASB said that it "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,” stated 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.”

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