FASB Issues Guidance in Transition Away from Interbank Offered Rates

The FASB issues guidance in transition away from interbank offered rates. The Accounting Standards Update (ASU) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. This guidance is ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

The Unites States and other countries use LIBOR and other interbank offered rates as benchmark or reference rates. Trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR, the benchmark interest rate banks use to make short-term loans to each other.

Global capital markets are moving away from LIBOR and other interbank offered rates toward rates that are more observable or transaction based and less susceptible to manipulation. So, the FASB launched a broad project in late 2018 to address potential accounting challenges expected to arise from the transition.

The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The ASU helps stakeholders during the global market-wide reference rate transition period. Therefore, it is in effect for a limited time through December 31, 2022.

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