In 2020, FASB issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provided temporary, optional expedients and exceptions for applying GAAP to held-to-maturity securities, contracts, hedging relationships, and other transactions affected by reference rate reform, most notably to:
- Simplify contract modification accounting.
- Allow hedging relationships to continue without dedesignation upon a change in certain critical terms.
- Allow a change in the designated benchmark interest rate to a different eligible benchmark interest rate in an existing fair value hedging relationship and allow flexibility in the accounting method for the effect of that change.
- Simplify or temporarily suspend the assessment of hedge effectiveness for cash flow hedges.
- Suspend the assessment of certain qualifying conditions for fair value hedges for which the shortcut method for assuming perfect hedge effectiveness is applied.
For additional details, see “FASB Finalizes LIBOR Transition Relief.”
On December 21, 2022, FASB issued ASU 2022-06, which extends the relief’s effective date. Due to the unique nature of the London Interbank Offered Rate (LIBOR) sunset, ASU 2020-04 had an unusual effective date. The relief was set to expire for contracts entered into or evaluated after December 31, 2022, which was one year after the then-expected LIBOR cessation date. However, on March 5, 2021, LIBOR’s regulator announced that certain USD LIBOR tenors will continue to be published until June 30, 2023. ASU 2022-06 extends the available relief to December 15, 2024.
The transition away from LIBOR will be complicated and likely will require significant hours to implement correctly for companies with a large volume of contracts. For more information, reach out to a professional at FORVIS or submit the Contact Us form below.