Project Pages

Secured Overnight Financing Rate—London Interbank Offered Rate Replacement

Project Description: A primary objective of this project is to consider replacing citations of the London Interbank Offered Rate (LIBOR) in GASB standards with one or more acceptable benchmark reference rates or, alternatively, developing criteria for an acceptable reference rate in lieu of identifying specific rates. The project also will address whether the requirement to cease hedge accounting due to a termination event should be amended to exclude terminations that result from amending an existing derivative instrument or entering into a new derivative instrument for the purpose of replacing LIBOR as the reference rate.

Status:
Exposure Draft Redeliberations

Secured Overnight Financing Rate—London Interbank Offered Rate Replacement—Project Plan


Background: LIBOR (and other IBORs, such as the Tokyo Interbank Offered Rate, TIBOR, and the Euro Interbank Offered Rate, EURIBOR) is a reference rate that is incorporated into the terms of approximately $350 trillion of financial instruments worldwide, about $150 trillion of which is benchmarked to U.S. LIBOR, including those entered into by U.S. state and local governments—predominantly interest rate swaps and other derivatives but also including floating rate bonds, loans, and other instruments.

LIBOR represents an average of the rates at which major British banks expect they can borrow from each other without putting up collateral. It is calculated each business day in London for 10 different currencies and 15 maturities from overnight to one year and is based on surveys of panels of large banks.

For a variety of reasons—including the diminishing objectivity of the rate due to a decreasing number of transactions in the markets underlying LIBOR (and other IBORs)—a multinational process is underway to establish new reference rates that are more reliable and robust.

In the U.S., the replacement reference rate will be the Secured Overnight Financing Rate (SOFR), which is calculated daily based on overnight transactions from the prior day’s trading activity in specified segments of the U.S. Treasury repurchase agreement market. As such, the rates are based on actual transactions rather than estimates, as is the case with LIBOR.

The most challenging aspect of the sunset of LIBOR likely will be its potential impact on the hedge accounting provisions of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. For derivatives that are effective hedges, changes in their fair value are recognized as deferred outflows of resources or deferred inflows of resources. Should a hedging derivative cease to be effective or terminate, the accumulated deferrals are recognized in investment income and subsequent changes in the derivative’s fair value also would be recognized in investment income.

The question arises whether the revision of the terms of a derivative to replace LIBOR with SOFR or another reference rate (or the replacement of the derivative with a virtually identical derivative but for the change in reference rate) would constitute a termination event that would end hedge accounting for that transaction. Although derivatives are less prevalent among state and local governments than they were at the time Statement 53 was issued, they remain widely used by states and other larger governments, certain business-type entities, and pension plans. For those governments, the dollar amounts involved are significant, making the termination of the derivative and the subsequent end of hedge accounting a notable financial event.

Accounting and Financial Reporting Issues: The major issues that will be considered during the project are as follows:
  • How should the replacement of LIBOR be addressed: (1) by replacing existing citations of LIBOR with SOFR or other new reference rates or (2) by describing the characteristics of an acceptable reference rate?
  • If the Board decides to pursue the latter, what are the characteristics of an acceptable reference rate?
  • Do the circumstances related to the revision or replacement of derivative instruments in response to the end of LIBOR merit an exception to the hedge accounting termination provision of Statement 53, similar to exception in Statement 64?
Project History:
  • Added to current technical agenda: December 2018
  • Task force established? No
  • Deliberations began: April 2019
  • Exposure Draft issued: September 2019
  • Comment period: September–November 2019
  • Redeliberations began: January 2020
  • Final Statement issued: March 2020  

Secured Overnight Financing Rate—London Interbank Offered Rate Replacement—Minutes


Minutes of Meetings, March 24–26, 2020

The Board reviewed the ballot draft of a final Statement, Replacement of Interbank Offered Rates, and provided clarifying edits. The Board then voted unanimously to approve the issuance of Statement No. 93, Replacement of Interbank Offered Rates.

Minutes Archive
 

Secured Overnight Financing Rate—London Interbank Offered Rate Replacement—Tentative Board Decisions


Statement No. 93, Replacement of Interbank Offered Rates, was approved in March 2020.