The London Interbank Offered Rate (LIBOR), which is referenced in approximately $350 trillion of contracts, is expected to be eliminated in 2021. This action comes in response to concerns about structural risks to interbank offered rates in general, but LIBOR in particular. Regulators in various jurisdictions around the world have been working to replace LIBOR and other interbank offered rates with reference interest rates that are supported by transactions in liquid and observable markets. Given the prevalent use of LIBOR, and other interbank offered rates expected to be discontinued, the volume of contracts that will have to be modified to replace these reference rates with alternative rates, and, therefore be subject to U.S. GAAP on contract modifications, may be overwhelming for many entities. In addition, changes in a reference rate could affect the application of hedge accounting, and certain hedging relationships may not qualify as highly effective during the period of the market-wide transition to a replacement rate.
To ease the expected burden on financial reporting related to reference rate reform, the Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to U.S. GAAP on contract modifications, hedge accounting, and other transactions.
ACT is an RSM Alliance Member. RSM’s white paper, Optional accounting expedients can make LIBOR transition easier, provides additional information about reference rate reform and discusses the temporary optional expedients and exceptions provided by the FASB, as well as the circumstances under which an entity may elect those expedients and exceptions. RSM’s white paper also discusses the effective date and transition guidance in ASU 2020-04, along with the sunset date for the temporary optional expedients (i.e., the date after which the optional expedients may no longer be applied).