The International Accounting Standards Board (IASB) and the US Governmental Accounting Standards Board (GASB) took action Thursday to support financial statement preparers during the uncertainty arising from the phasing out of interest rate benchmarks such as interbank-offered rates.
The impending phasing out of rates such as the London Interbank Offered Rate (LIBOR) will lead preparers to use new benchmarks such as more observable or transaction-based rates, which are seen as less vulnerable to manipulation. LIBOR is expected to cease in its current form in 2021.
In preparation for the change, the IASB amended its new and old financial instruments standards, IFRS 9, Financial Instruments, and IAS 39, Financial Instruments: Recognition and Measurement, as well as IFRS 7, Financial Instruments: Disclosures.
- Modify some specific hedge accounting requirements to provide relief from potential effects of the uncertainty caused by the interbank-offered rate reform.
- Require companies to provide additional information to investors about their hedging relationships that are directly affected by these uncertainties.
The IASB also has started work on considering the potential consequences on financial reporting of replacing an existing benchmark with an alternative.
The amendments take effect on 1 January 2020, but early application is permitted.
GASB, meanwhile, proposed new guidance to assist state and local governments in the transition from interbank offered rates to other reference rates.
The exposure draft, Replacement of Interbank Offered Rates, would:
- Allow governments to continue using hedge accounting for certain hedging derivative instruments that are amended or replaced to change the reference rate from an interbank-offered rate.
- Clarify that hedging termination provisions when an interbank-offered rate is replaced as the reference rate of a hedged item.
- Clarify that the uncertainty associated with reference rate reform does not, by itself, affect the probability that an expected transaction will occur.
- Remove LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap.
- Add the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates.
- Clarify the definition of "reference rate".
- Provide an exception to the lease modifications guidance in GASB Statement No. 87 for certain interbank offered rate-related lease contract amendments.
The removal of LIBOR as an appropriate benchmark interest rate as proposed would be effective for reporting periods beginning after 15 December 2020. All other requirements of this proposed statement would be effective for reporting periods beginning after 15 June 2020. Earlier application would be encouraged.
Comments will be accepted through 27 November and can be emailed to firstname.lastname@example.org.
FASB addresses rate reform
Earlier this month, FASB issued a proposal related to rate reform.
The proposal would provide optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships affected by reference rate reform.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is FM magazine's editorial director.