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FASB proposes temporary guidance to ease transition from Libor

The Financial Accounting Standards Board is proposing a temporary guidance to ease the transition of companies from the London Interbank Offered Rate and other interbank offered rates.

The accounting standards update aims to provide optional measures for applying GAAP to contract modifications and hedging relationships that use Libor or another reference rate that is expected to be discontinued. The FASB noted it has received feedback from stakeholders regarding challenges likely to arise from the reference rate reform, including those related to the significant volume of contracts and other arrangements that need to be modified. Stakeholders said application of existing accounting standards on modifications could be costly and burdensome.

Specific to hedge accounting, stakeholders also said changes in a reference rate could disallow the application of certain hedge accounting guidance. They are concerned that the inability to apply hedge accounting due to the reform would result in financial reporting outcomes that would not reflect intended hedging strategies.

In its temporary guidance, the FASB is proposing to simplify accounting evaluations for contract modifications if certain criteria are met. It is also proposing to preserve hedge accounting when a contract is modified and during the temporary transition period, with any hedge breakage or mismatch being visible in the financial statements.

The proposed guidance will become effective upon issuance of a final update and through December 31, 2022. Stakeholders can provide comments on the proposed accounting standards update until Oct. 7.

The transition away from Libor will come nearly a decade after a plot to rig the benchmark rate was unearthed. In the scandal's aftermath, several alternatives to Libor were proposed, including secured overnight financing rate, which measures the cost of borrowing cash overnight collateralized by Treasury securities.