On June 19, 2019 the Wall Street Journal released an article regarding the Libor phaseout and the advances made by the Financial Accounting Standards board (FASB).
The article states that FASB explored ways to remove the accounting burden that companies and organizations currently experience when transitioning away from Libor to a new reference rate. The proposed method will allow companies avoid a multi-step evaluation, or expensive administration changes, to account for a transition from Libor to a new reference rate. Under the existing rules, an organization must calculate if a change in reference rate results in a change of 10% or more to future cash flows. If such change exists, the organization must account for it as a new contract.
“Today’s decisions will ease, from an accounting standpoint, the transition to a new reference rate for all organizations, thereby reducing accounting cost and complexity,” FASB Chairman Russell G. Golden said in a statement.
According to the article, “The board’s decision would apply to loans, debt, leases and other financial arrangements. The proposed method still must be incorporated in a proposal to amend existing rules, which would undergo a public comment period before being finalized and approved. FASB expects to change the rule in time for the transition date away from Libor which is set to occur at the end of 2021.”
The proposed rule change is promising in that it will significantly decrease an accounting burden on organizations that must transition away from Libor. As the Libor phaseout date approaches, companies are beginning to communicate to investors the possible drawbacks to transitioning to a new interest rate benchmark. Drawbacks noted include possible increase of borrowing costs, as well as potential difficulties hedging currency and interest rate risks.
The new changes to the Libor phaseout can be complex and confusing. HedgeStar is here to help you through the transition, while offering full-service hedging and reporting solutions. For everything from implementing hedging programs, accounting related to hedging programs, and training related to these services - HedgeStar will work with you through the entire process.
To learn more about hedging, hedge accounting and how HedgeStar can help you call us today: 866-200-9012.
For the full article: Wall Street Journal