GASB releases proposal for Libor transition

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The Governmental Accounting Standards Board unveiled proposed new accounting and financial reporting guidance to assist state and local governments in the transition away from Libor.

The exposure draft, Replacement of Interbank Offered Rates, proposes the removal of all inter-bank offered rates as an appropriate benchmark interest rate effective for reporting periods beginning after Dec. 15, 2020.

It was broadened beyond beyond the London Inter Bank Offered Rate of Libor to include all other IBORs offered in other countries, including Switzerland, Japan and the European Union.

“We just broadened it out just to make sure we weren’t going to be solely Libor specific,” said Jeffrey Previdi, GASB’s vice chairman. “We are not aware of other IBORs being used in the U.S. government space, but just to be safe, we included it.”

The proposal adds the Secured Overnight Financing Rate (SOFR) and the Effective Federal Funds Rate as appropriate benchmark interest rates.

The statement allows governments to continue using hedge accounting for certain hedging derivative instruments that are amended or replaced to change the reference rate from an IBOR.

It also clarifies the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item and that the uncertainty associated with reference rate reform does not, by itself, affect the probability that an expected transaction will occur.

“If you change your reference rate, then typically that would be an event to cause a termination in hedge accounting and the value of that hedge that is sitting on your balance sheet would flow through your income statement,” Previdi said.

The proposal allows an amendment to replace the reference rate that would not constitute a termination within certain guardrails that prevent changing the terms of the swap.

It also clarifies the definition of reference rate, and provides an exception to the lease modifications guidance in Statement 87 for certain IBOR-related lease contract amendments.

“We don’t know how it’s going to be done,” Previdi said. “Certain governments may simply amend their swaps and debt instruments to replace the rates. In certain cases they may actually execute a new swap.”

Emily Brock, director of the federal liaison center for the Government Finance Officers Association, said her organization was consulted by GASB during its outreach to formulate the proposal.

Brock said GFOA will be submitting formal comments on the exposure draft prior to the end of the 60-comment period on Nov. 27.

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Hedging Accounting Accounting standards GASB GFOA Washington DC