LIBOR – Out the Door

In response to the imminent sunsetting of the London Interbank Offered Rate (LIBOR), the Financial Accounting Standards Board (FASB) issued guidance to assist organizations with ensuing accounting ramifications. A significant number of contracts and agreements will be rewritten or amended to replace the reference to LIBOR (or other discontinued reference rate) with a new reference rate, and include:

• Contracts with customers, 
• Debt agreements, 
• Lease agreements, and 
• Hedges 

Accounting Standards Update (ASU) 2020-04, Reference Rate Form (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provides optional expedients and exceptions for accounting for new reference rate modifications to contracts accounted for under Topics:

• 310, Receivables
• 470, Debt
• 840, Leases
• 842, Leases
• 815, Derivatives and Hedging

The optional expedients and exceptions aim to reduce the burden of accounting for the changes, particularly for organizations with multiple impacted contracts.  Under ASU 2020-04, reference rate modifications may be considered modifications to existing contracts rather than new contracts, which eliminates the need to challenge previous accounting determinations. Qualifying contractual interest rate changes will be accounted for prospectively upon contract modification. Reference rate modifications to leases have no bearing on lease classification or the discount rate used to value lease assets and liabilities. Additional options and exceptions to current GAAP are permitted for hedge accounting.

The guidance includes a one-time election allowing an organization to sell and/or transfer debt securities classified as held-to-maturity if those securities are tied to the LIBOR or other sunsetting rate. The election must be made before January 1, 2023, and only securities classified as held-to-maturity before January 1, 2020 are eligible.

The guidance was effective upon issuance and remains in effect through December 31, 2022.  If elected the guidance must be applied to all agreements and contracts accounted for under the same Topic.

The NAIC Statutory Accounting Procedures Working Group (SAPWG) moved quickly to expose Interpretation 20-01 with a significantly shortened comment period ending April 2, 2020 to adopt most of the transition guidance from the FASB ASU except for the provision for held-to-maturity debt securities, which is not a statutory accounting concept. This interpretation is expected to be adopted after a brief exposure period.

For information on the impetus of this change, read this article: LIBOR Phase-Out Expected After 2021 – Trillions of Dollars Exposed.

If you have any questions about this, contact the Johnson Lambert team.