On June 19, 2019, the Financial Accounting Standards Board (FASB) announced that it had reached a tentative decision to provide accounting relief for organizations required to modify loans, debt, leases, and other financial instruments that currently use LIBOR as the reference interest rate.

Under current FASB rules, an organization with a LIBOR-based financial instrument must determine whether replacing LIBOR with an alternate reference rate will modify the instrument's expected cashflow by 10% or more. If it does, the organization is required to account for the modified instrument as a new one. The organization is required to perform this task for every LIBOR-based instrument in the organization's books. This is likely to impose a substantial financial and accounting burden on many organizations.

Under FASB's tentative decision, for contracts that meet certain criteria, a change in the contract’s reference rate from LIBOR to an alternative reference rate would be treated as a continuation of the existing contract rather than the creation of a new one.

The proposed rule is intended to simplify the accounting that would otherwise be required for credit agreements and myriad other financial instruments tied to LIBOR. For organizations that must prepare their financial statements in accordance with generally accepted accounting principles (GAAP) this change will reduce accounting complexity and cost.

To implement this change, it must be incorporated in a proposal to amend existing rules. FASB must then release the rule for public comment before a final version can be approved.

Trillions of dollars in loans, derivatives, and other financial contracts are tied to LIBOR, which is expected to be phased out of global capital markets by 2021 in favor of a transaction-based reference rate (see Legal Update, FCA Chief Executive speech on future of LIBOR). According to FASB's press release, reference rate reform has been a top priority since the Financial Conduct Authority's (FCA) 2017 decision to abandon LIBOR (see Legal Update, FCA Chief Executive Speech on Future of LIBOR). In response, FASB launched a broad effort to deal with accounting problems resulting from the transition to a LIBOR alternative.

In 2018, FASB added the secured overnight financing rate (SOFR) as an acceptable alternative to LIBOR for hedge accounting purposes (see Legal Update, FASB Adds SOFR to List of US Benchmark Rates Eligible for Hedge Accounting). FASB plans to address other hedging-specific reference rate issues at a public meeting in July.