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FASB Extends Accounting Relief as Companies Switch From Libor

The Financial Accounting Standards Board allowed companies to continue ignoring certain rules around modifying loan contracts and accounting for hedges of interest-rate risks as they move away from the London interbank offered rate.

Libor and other benchmarks underpin trillions of dollars of financial contracts, including corporate loans, mortgages and interest-rate derivatives. Most U.S. companies have picked the Secured Overnight Financing Rate, or SOFR, as their replacement for Libor, which is being phased out after bankers allegedly rigged the rate. Libor is set to expire June 30, 2023.

The FASB initially gave companies relief in March 2020, in an effort to help them work through the large volumes of financial contracts they needed to update or renegotiate as part of their preparations to abandon Libor. On Wednesday, it voted to extend the relief, which is optional, until Dec. 31, 2024, past Libor’s end. That covers the period through which banks can continue referencing existing U.S. dollar Libor.

The relief loosens certain hedge-accounting rules and reduces the effort needed to determine whether changes to a Libor-linked loan require businesses to record that loan as a new one or as a continuation of an existing one. Before the relief, companies that project at least a 10% change in their cash flows as a result of modifying a loan had to record a new loan and book a gain or a loss. Under the relief, companies that only change the reference rate, as opposed to a more substantive alteration such as extending the loan’s maturity, don’t have to record a new loan.

U.S. officials last year supported a decision by the U.K. Financial Conduct Authority to allow banks to continue using U.S. dollar Libor, alongside Libor in other currencies, for existing debt for an additional 18 months, through June 2023. U.S. banks stopped issuing new financial contracts using Libor at the end of last year.

The FASB would consider providing another extension for companies if regulators further delay the end of Libor, board member

Christine Botosan

said Wednesday. “But I think we’re in pretty good shape with the time period that we decided,” she said. The FASB expects to formally issue the relief extension by year-end, a spokeswoman said.

Average daily trading volumes of SOFR-based derivatives have exceeded those linked to Libor each month since June. In September, $3.99 trillion globally of futures and options contracts tied to SOFR changed hands each day, up from $207 billion in the same month a year ago, according to exchange operator

CME Group Inc.

About $1.94 trillion in Libor-based derivatives were traded per day in September, down from $2.94 trillion a year earlier.

Companies are considering which version of SOFR to switch to from Libor. Term SOFR, unlike the also popular overnight version of SOFR, particularly benefits companies that borrow or lend in one-, three- or six-month periods, and helps project their interest expense.

The Federal Reserve and other regulators have said they prefer that banks and their borrowers replace Libor with a version of SOFR because of its stability, as opposed to credit-sensitive alternatives such as the Bloomberg Short Term Bank Yield Index, known as BSBY. Regulators pointed to the market volatility during the Covid-19 pandemic, during which SOFR supported large numbers of financial arrangements.

The board on Wednesday also removed from its standard-setting agenda plans for broader changes to hedge accounting amid the shift away from Libor, particularly involving companies’ hedging of interest-rate risk in the U.S., saying the project isn’t a priority compared with other issues.

Write to Mark Maurer at [email protected]

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Appeared in the October 6, 2022, print edition as ‘FASB Extends Rules Relief for Libor Shift.’