On the Horizon

Reference Rate Reform


In September, the FASB will issue a proposed Accounting Standards Update (ASU) that would make it easier for companies and other organizations to transition contracts and other arrangements to a new reference interest rate.
Currently, trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR.

In the coming years, global capital markets are expected to move away from indexing interest payments to interbank offered rates such as the London Interbank Offered Rate (LIBOR).  Currently, trillions of dollars in loans, derivatives, and other financial contracts reference LIBOR.

With this major transition on the horizon, the FASB undertook a broad project to proactively address accounting issues that could arise as a result.

The proposed ASU would facilitate a smoother transition to a new reference rate in the following areas:
  • Contract Modifications: For a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract. This decision applies to loans, debt, leases, and other arrangements.
  • Hedge Accounting Relief: A company or other organization would be permitted to preserve its hedge accounting when updating its hedging strategies in response to reference rate reform.
The proposed guidance would be optional. Companies and other organizations that elect to apply the proposed guidance would apply it prospectively—that is, the new guidance could be elected for contract modifications and hedge evaluations occurring after the date a final ASU is issued. The guidance would also be temporary, expiring on January 1, 2023.

Once the proposed ASU is issued, stakeholders will have 30 days to review and comment on it.

 

Simplifying the Balance Sheet Classification of Debt—Revised Proposal


In September, the FASB plans to issue a revised proposal on balance sheet classification of debt.

In January 2017, the FASB issued its original proposal on the project, which seeks to replace the current, fact-specific guidance with an overarching, cohesive principle for determining whether debt, or other instruments within the scope of the proposal, should be classified as a current or noncurrent liability as of the balance sheet date.

Based on input received from stakeholders—including the Private Company Council—the Board decided to add proposed requirements to preclude the consideration of unused long-term financing arrangements, such as a line of credit, and to allow the consideration of grace periods. The revised proposal will reflect these changes; no significant changes were made to the other aspects of the original 2017 proposal.

The revised proposal will be open for comment for a period of 45 days.