FASB Extends LIBOR Accounting Relief

The London Interbank Offered Rate (LIBOR) interest rate benchmark continues its slow and steady path to wind-down, a result of being an unsecured rate that has been subject to manipulation by banks. The rate may be referenced in a variety of contracts including promissory notes, surplus notes, lines of credit, loans and derivatives that require amendment. 

Background

The Financial Accounting Standards Board (FASB) issued transition guidance in March 2020, Topic 848 – Reference Rate Reform, to ease the accounting burden on companies transitioning away from LIBOR. It offers practical expedients and exceptions to allow contracts meeting certain requirements to be accounted for as a continuation of a contract rather than be reassessed or remeasured as a result of changes in the reference rate. The initial sunset date for publishing LIBOR was December 31, 2021 and for the guidance in Topic 848 was December 31, 2022, to cover the entire LIBOR publication period. 

Deferral of Sunset Date 

In early 2021, the UK Financial Conduct Authority, which regulates financial markets in the UK, announced that components of the LIBOR would be published through June 2023. In response to the announcement, in December 2022, the FASB issued ASU 2022-06: Reference Rate Reform (topic 848) – Deferral of the Sunset Date of Topic 848, which extends the sunset date of the guidance in Topic 848 to December 31, 2024. The change aligns the practical expedients permitted by the transition guidance with the end of the LIBOR rate publication. 

US banks stopped issuing new contracts with LIBOR as a reference rate at the end of 2021. 

Secured Overnight Financing Rate

With LIBOR fading into the sunset, the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) emerged as the preferred reference rate among companies during this time. 

The FASB considered expanding the definition of the SOFR swap rate to include other versions of the SOFR beyond the OIS, such as the forward looking, term based version of the SOFR. Given the relative novelty of the SOFR as a benchmark rate, the FASB elected to not expand allowable benchmark rates at this time but may consider an expansion in the future.

Statutory Accounting Update

The NAIC closely monitors the activities of the FASB. We expect the NAIC to follow suit as it has in the past and extend its reference rate guidance for statutory filers at a future meeting.

If you have any questions, please contact the Johnson Lambert Team.