In March 2020, the GASB issued Statement No. 93 “Replacement of Interbank Offered Rates.” As you amend agreements to replace LIBOR as a reference rate, keep in mind the provisions on this proposed standard to minimize any accounting impact.
As a result of LIBOR’s end as a reference rate, agreements that currently refer to LIBOR will need to be amended to refer to another short-term lending benchmark, such as the Secured Overnight Financing Rate (SOFR).
In the governmental environment, there are two standards that currently reference LIBOR: Statement No. 53 on derivatives and Statement No. 87 on leases. In addition, there’s currently no guidance in those GASB standards that provides any type of accounting exception related to an IBOR replacement.
Why does it matter?
Currently Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, 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. Terminating hedge accounting means the previously recorded deferred inflow/outflow would be recognized on the flow’s statement.
This standard amends Statement 53 by providing an exception to hedge accounting termination provisions for certain hedging derivative instruments when an IBOR is replaced as the reference rate. For those using critical consistent terms to assess hedge effectiveness, this standard removes LIBOR as an appropriate benchmark interest rate, using the interest rate on direct Treasury obligations of the U.S. government, the Effective Federal Funds Rate (EFFR) and the Secured Overnight Financing Rate (SOFR) as replacements.
Similarly, this standard changes to GASB 87, Leases, would allow for an exception to the lease modifications guidance when certain lease contracts are amended to replace an IBOR as the rate upon which variable payments depend. Typically, a lease modification for a new rate would require the lease liability to be remeasured, however, this standard no longer considers an IBOR rate replacement to be a lease modification.
We recommend that as your organization is amending your agreements to replace LIBOR as a reference rate, keep in mind the provisions on this proposed standard to minimize any accounting impact.
Even though most of the requirements of the standard are not effective until reporting periods beginning after June 15, 2020, the GASB does allow for earlier application. If you have any questions about GASB standards, feel free to reach out to your Plante Moran advisor.