FASB LIBOR relief draws support, deadline nears

Dive Brief:

The Financial Accounting Standards Board (FASB) is running out the clock as it prepares to take another step toward providing a two-year extension of the relief borrowers now have regarding how they account for a loan’s switch away from the London Interbank Offered Rate (LIBOR).
The board next month is set to consider feedback it received during a public comment period on its proposal to extend the expiration of the relief two years to Dec. 31, 2024 from Dec. 31, 2022, according to FASB spokesperson Christine Klimek.
Given that the board takes guidance from accountants and others in the industry when making such changes, the momentum behind the proposal looks to be bolstered by the strong support voiced for it in many of the 16 letters from respondents. The feedback came from major accounting firms and trade groups as well as financial services firms involved in hedging.

Dive Insight:

Banks effectively stopped making new LIBOR loans on Jan. 1 but the market won’t see the popular U.S. dollar tenors discontinued until June 30, 2023.

FASB’s proposal would delay more onerous accounting treatment that borrowers with legacy LIBOR loans would otherwise likely face. With the relief, borrowers that switch existing LIBOR-linked debt to a new benchmark would continue to be able to treat the loan change as a modification rather than having to test to determine whether to account for the instrument as a new loan, experts say.

The Mortgage Bankers Association, the American Bankers Association, the International Swaps and Derivative Association (ISDA) along with accounting firms EY, PricewaterhouseCoopers and Deloitte are among the financial sector players that outlined their backing of the extension of the relief plan. Still, at least one firm suggested the extension may not be long enough.

“There are reference rates that are not expected to become unrepresentative until closer to this date, which may not give entities with exposure to those rates ample time to facilitate completing their reference rate reform activities,” Dan Gentzel, managing director of global hedge accounting at Chatham Financial wrote on June 2. “As a result, we believe the Board should continue to monitor global reference rate reform activities and consider extending the sunset date further to provide impacted entities with additional time to modify contracts.”

Respondents expressed more concern about a related accounting update proposed by FASB to revise the definition of the term Secured Overnight Financial Rate (SOFR) and Secured Overnight Index Swap Rate (SOFR Swap Rate). SOFR is the Fed’s preferred LIBOR replacement.

The issue stems from an update made in 2018 before LIBOR phaseout began. At that time the board added the SOFR term to the codification, a step that enabled the SOFR Swap Rate to be considered a benchmark rate that is eligible to be designated as a hedged risk for fixed-rate financial instruments, according to a FASB report on the matter.

However, the earlier update did not include the forward-looking, term-based version of the SOFR rate because no cash or derivative instruments were at that time indexed to SOFR. Now the board has proposed to include under the definition of the SOFR Swap Rate other rates based on SOFR such as SOFR term.

A number of respondents said more clarity was needed and suggested the current definition was still too limiting and potentially confusing given the emergence of related but different benchmarks to replace LIBOR. The CME Group in a June 6 letter suggested that benchmark’s name be modified to be described as Term SOFR or preferably CME Term SOFR, given that the CME benchmarks are “rapidly growing in usage.” Over $1.6 trillion in loans reference the CME Term SOFR benchmarks, the letter states, citing data from Refinitiv Deal Screener.

“As written, we believe there could be different interpretations regarding whether only SOFR OIS [overnight index swap] and the SOFR term rate are permissible or other SOFR OIS based rates are also permissible,” the June 6 letter from CME Group Senior Managing Director Sean Tully states. “We believe that market participants would be better served by a more industry-aligned and descriptive phrase than ‘SOFR term’.”