FASB Issues Proposed Amendments to Provide Temporary Optional Guidance During Reference Rate Transition Period | Practical Law

FASB Issues Proposed Amendments to Provide Temporary Optional Guidance During Reference Rate Transition Period | Practical Law

The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update that would provide temporary optional guidance to assist market participants during the global transition away from reference rates such as LIBOR that are expected to be discontinued due to reference rate reform.

FASB Issues Proposed Amendments to Provide Temporary Optional Guidance During Reference Rate Transition Period

by Practical Law Finance
Published on 19 Sep 2019 • USA (National/Federal)
The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update that would provide temporary optional guidance to assist market participants during the global transition away from reference rates such as LIBOR that are expected to be discontinued due to reference rate reform.
On September 5, 2019, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (proposed ASU) that would provide temporary optional guidance to assist market participants during the global transition away from reference rates such as LIBOR that are expected to be discontinued due to reference rate reform.
Specifically, the amendments would:
  • Simplify accounting analyses under current generally accepted accounting principles (GAAP) for contract modifications, subject to certain criteria.
  • Permit hedging relationships to continue without designation upon certain changes in the critical terms of an existing hedging relationship due to reference rate reform, subject to certain criteria.
  • Provide optional expedients for existing fair value hedging relationships for which the derivatives designated as the hedging instrument are affected by reference rate reform, subject to certain criteria. "Optional expedients" are temporary methods that are meant to reduce costs and complexity and that can be used in place of the current accounting standards for a particular topic or subtopic that would otherwise be required to be applied
  • Provide temporary optional expedients for cash-flow hedging relationships affected by reference rate reform, subject to certain criteria.
The amendments would be effective for all entities upon issuance of a final ASU, and would only apply to transactions made or entered into prior to December 31, 2022.
The proposed ASU is the result of FASB's broad effort to address accounting issues resulting from the transition to a LIBOR alternative. According to FASB, 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 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).
In June and July 2019, the FASB board provided assurances that it would provide accounting relief for companies required to modify contracts because of the transition (see Legal Update, FASB Provides Tentative Accounting Relief for Transition from LIBOR).
The proposed ASU includes 13 specific questions on which FASB is soliciting public comment, and FASB is requesting comment on all aspects of the proposed guidance. Public comment on the proposal must be submitted by October 7, 2019.
FASB issued a press release and overview of the proposed ASU.
Update: On November 13, 2019, FASB approved the proposed ASU. According to FASB, the final ASU is expected to be issued in early 2020.