FASB Proposes Scope Clarification for Reference Rate Relief

On July 27, 2017 the Financial Conduct Authority, the U.K.’s top regulator, tasked with overseeing Libor, announced the benchmark will be phased out by 2021. Alternative risk-free rates are being set up for the different currencies. For the US Dollar, the US Fed’s Alternative Reference Rates Committee (ARRC) has recommended using the Secured Overnight Financing Rate (SOFR), which has been published since April 2019. For the British Pound, it is the Sterling Over Night Index Average (SONIA), and for the Euro, the Euro Short-Term Rate (€STR).Regulators are now expecting financial institutions to actively prepare for the cessation of LIBOR and the adoption of alternative risk-free rates. The FCA and Prudential Regulation Authority (PRA) were the first regulators globally to ask firms for their preparation and actions to manage the LIBOR transition, in a September 2018 letter. Other regulators, including the European Central Bank’s supervisory board, followed. ISDA has run several consultations to improve the fallback process. Read more

FASB issued a proposal Thursday that is intended to clarify the scope of the board’s guidance on reference rate reform.

In March, FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The standard was issued to address accounting challenges resulting from the sunsetting of the London Interbank Offered Rate (LIBOR) as well other benchmark interest rates banks use to make short-term loans to one another.

FASB ASC Topic 848 provides temporary, optional expedients and exceptions for using GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate that is expected to be discontinued. Read more

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