FASB Advances SOFR Replacement for LIBOR References: Updates Accounting Standards Codification
The Financial Accounting Standards Board (FASB) took steps on Wednesday to remove references to the discontinued London Interbank Offered Rate (LIBOR) from its Accounting Standards Codification, using the Secured Overnight Financing Rate (SOFR) as the replacement benchmark. Staff recommended this update because over 100 LIBOR references in the Codification reduced the usefulness of the guidance. Board members described it as a "housekeeping" project that would not change accounting practices and voted to draft an exposure draft with a relatively short comment period of 60 days.
Key Takeaways
- The Financial Accounting Standards Board (FASB) on Wednesday moved to remove references to the discontinued London Interbank Offered Rate (LIBOR) swap rate from its Codification, the digital authoritative source of generally accepted accounting principles, replacing them with a benchmark rate based on the Secured Overnight Financing Rate (SOFR).
- Staff for the U.S. accounting standard-setter recommended the change at Wednesday's board meeting, noting that retaining more than 100 LIBOR references would reduce the usefulness of the Codification's guidance.
- Board members, some of whom called it a "housekeeping" project that would not change accounting practices, voted to draft a proposed standards update with a relatively short 60-day comment period. "The Codification should be updated for LIBOR references to reflect changes already captured in contracts in global capital markets," board member Joyce Joseph said during the meeting.
Dive Insight
LIBOR, once the floating-rate benchmark for trillions of dollars in debt, has been phased out in recent years after its reputation was tarnished by an interest rate manipulation scandal. U.S. dollar LIBOR rates ceased publication after June 2023, according to a JPMorgan report at the time.
Banks effectively stopped issuing new LIBOR loans in 2022 and largely transitioned to SOFR, CFO Dive previously reported. During this week's meeting, the board considered replacing the old benchmark references with a generic rate or a blended rate, but ultimately supported SOFR as the sole replacement.
Board member Marsha Hunt said it was the most "expeditious and straightforward" option.
FASB has previously addressed the LIBOR transition. In a 2018 accounting standards update, it added the SOFR overnight index swap rate to the list of benchmarks eligible for hedge accounting.
That update, under Derivatives and Hedging (Topic 815), noted that the Federal Reserve Board and the Federal Reserve Bank of New York had expressed concerns about "the sustainability of LIBOR" and required consideration of including the OIS rate linked to SOFR as an eligible benchmark for hedge accounting.