Reference Rate Reform Sunset Date Extended
In March of 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, in order to address the concerns related to potential accounting consequences of the anticipated transition away from the use of LIBOR and other interbank offered rates.
ASU 2020-04 essentially represents a temporary relief provision from potentially complex accounting considerations that would normally need to be addressed when certain contracts are modified. In a general sense, the optional expedients in the ASU allow entities whose contracts are modified in response to reference rate reform to forgo reassessment of previous accounting determinations and eliminate the potential requirement to remeasure such contracts at the modification date. The ASU provides for similar relief regarding hedging relationships that are tied to a discontinued reference rate, and also allows for a one-time election to modify the classification of, or sell, held-to-maturity debt securities that referenced such a rate.
The FASB originally offered the election of these temporary provisions during a closed period from March 12, 2020 through December 31, 2022.
Given that the UK Financial Conduct Authority has delayed the intended cessation date of certain published USD LIBOR rates to June 30, 2023, coupled with the fact that a significant number of modifications are still in process or expected to be completed in the coming years, the FASB has issued a two-year deferral of the sunset date of these provisions through December 31, 2024 by issuing ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.
This will be welcome news to financial institutions with a significant number of contracts tied to expiring reference rates (as well as their borrowers) who anticipate that they will need to make modifications to such contracts into 2023 and beyond, and want to apply the available expedients to ease the accounting burden related to such modifications.
A link to the full ASU can be found here.
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