The GASB has issued an Exposure Draft entitled Replacement of Interbank Offered Rates. Many governments have entered into agreements (particularly derivative instruments and lease agreements) in which variable payments made or received depend on an interbank offered rate (IBOR)—most notably, the London Interbank Offered Rate (LIBOR). As a result of global reference rate reform, LIBOR is expected to cease to exist in its current form at the end of 2021, prompting governments to amend or replace financial instruments in order to replace LIBOR with other reference rates by either changing the reference rate or adding or changing fallback provisions related to the reference rate.
GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, requires a government that renegotiates or amends a critical term of a hedging derivative instrument, such as the reference rate of a hedging derivative instrument’s variable payment, to terminate hedge accounting. The Exposure Draft would provide an exception to this rule by allowing hedge accounting to continue when an IBOR is replaced as the reference rate of the hedging derivative instrument.
The Exposure Draft would also clarify that when evaluating the probability of the occurrence of an expected transaction pursuant to paragraph 29 of Statement No. 53, the uncertainty related to the continued availability of IBORs does not by itself affect the assessment of whether a hedged expected transaction is probable.
Finally, for the purpose of the qualitative evaluation of the effectiveness of an interest rate swap under paragraphs 35-38 of Statement No. 53, the Exposure Draft would remove LIBOR as an appropriate benchmark interest rate and add the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates.
GASB Statement No. 87, Leases, requires that a government apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable, when the replacement of the rate on which variable payments depend in a lease contract occurs. The Exposure Draft would provide an exception to the lease modifications guidance in Statement No. 87 for lease contracts that are amended to replace an IBOR as the rate upon which variable payments depend.
The provision removing LIBOR as an appropriate benchmark interest rate for the evaluation of the effectiveness of derivative instruments would be effective for periods beginning after December 15, 2020. All other provisions of the Exposure Draft would be effective for fiscal years beginning after June 15, 2020. Earlier application is encouraged.
Comments are due on this Exposure Draft to the GASB by November 27, 2019. The full text of the Exposure Draft is available here.
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