On April 20, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that includes two issues concerning reference rate reform. The first concerns the transition from referencing the London Interbank Offered Rate (LIBOR) and other interbank offered rates (IBORs) toward new reference rates that are more dependable and stable. LIBOR is presently the most widely used reference rate in the global financial markets. The second expands the use of Secured Overnight Financing Rate (SOFR)-based interest rates available as benchmark interest rates.
Proposed Sunset Date Deferral
The first issue the proposal addresses the period of time preparers may use the Reference Rate Reform relief guidance issued in ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional guidance to mitigate the potential burden in accounting for reference rate reform on financial reporting. The guidance in Topic 848 provides relief during the temporary transition period, so the FASB included within it a sunset provision based on expectations of when the LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the anticipated cessation date of certain tenors of USD LIBOR to June 30, 2023.
The amendments in the proposed ASU would postpone the sunset date of Topic 848 from December 31, 2022, to December 31, 2024 to guarantee the relief in Topic 848 covers the period of time during which a substantial number of revisions may take place. After that time, entities would no longer be permitted to employ the relief in Topic 848.
Proposed Amendments to the Definition of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate
The second issue of the proposal relates to the definition of the SOFR Overnight Index Swap (OIS) Rate. In 2018, FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The update added the term Secured Overnight Financing Rate (SOFR) Overnight Index Swap Rate (SOFR Swap Rate) to the Master Glossary of the FASB Accounting Standards Codification®. The revisions in Update 2018-16 also allowed a rate that matches the definition of the SOFR Swap Rate to be deemed a benchmark interest rate and designates it as the hedged risk for recognized fixed-rate financial instruments or a projected issuance or purchase of fixed-rate financial instruments.
The FASB also noted in Update 2018-16 that the definition of the SOFR Swap Rate was specific to the OIS rate based on SOFR. The FASB has stated that it would both oversee the developments of the advanced, term-based version of the SOFR rate (SOFR term) and consider adding SOFR term as a benchmark interest rate in the future. Premised on the developments of SOFR term in the marketplace, the proposed ASU would modify the definition of the SOFR Swap Rate, including other versions of SOFR (such as SOFR term) as a benchmark interest rate under Topic 815.
The FASB welcomes feedback from stakeholders on the proposed ASU by June 6, 2022.