July 1, 2019 - In a decision that could significantly ease the loan market’s transition from Libor to an alternative reference rate, the Financial Accounting Standards Board announced recently that it will soon take steps toward providing much-needed accounting relief for firms and organizations affected by the transition.

In a press release issued on June 19, the FASB said that “for a contract that meets certain criteria, a change in that contract’s reference interest rate would be accounted for as a continuation of that contract rather than the creation of a new contract.” The decision applies to loans, debt, leases, and other instruments.

The decision means that organizations that change the terms of a credit agreement won’t have to go through the series of complex steps usually required to determine whether the altered terms create a new agreement or simply modify the agreement.

Currently, organizations have to determine whether the changed terms modify the expected cash flows by more than 10%, in which case the altered terms effectively replace the old agreement with a new one.

The test must be applied for every instrument on a company’s books. Without relief from having to perform the test, then, transition to a new reference rate could create a lot of additional work for an organization’s accountants.

While the statement can be taken as a sure indication of the FASB’s intentions, the rule still must be incorporated in a proposal to amend existing rules. It then must be released for public comments before going through the final approval phase.

The LSTA is a member of the Alternative Reference Rate Committee’s Accounting & Tax working group and supports the ARRC’s initiatives directed at seeking the necessary accounting relief for smoothing the transition to LIBOR.

The LSTA has previously reported on the accounting issues associated with LIBOR transition. Among the issues that have been raised are the 10% test, discussed above, and certain hedge accounting issues.

While the FASB did not announce its intention to provide hedge accounting relief, it did say that it would take up this issue in its July meeting. Together with relief from having to perform the 10% test, relief on the hedge accounting issues would resolve virtually all accounting-related concerns associated with Libor transition.