The expiration date for guidance on dealing with the demise of a now-defunct reference rate has been extended, to Dec. 31, 2024, by the accounting profession, according to a statement issued Wednesday.
The Financial Accounting Standards Board (FASB), in an accounting standards update (ASU) said it was deferring the sunset date of its guidance for reference rate reform. Specifically, the FASB said its guidance contained in ASU 2020-04 (Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting) would continue for the next two years. The ASU provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting.
A year ago, the widely used LIBOR (formerly known as the London Interbank Offered Rate), a reference rate used in mortgages, student and car loans (among other things) officially became defunct. Banks and other financials were directed to use other reference rates, including the Secured Overnight Financing Rate (SOFR), a reference rate developed through the Federal Reserve.
Legacy contracts using LIBOR, however, may continue to use the reference rate until June 30, 2023, after which LIBOR will no longer exist.
“The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published,” FASB wrote in the update. “In 2021, the UK Financial Conduct Authority (FCA) delayed the intended cessation date of certain tenors of USD LIBOR to June 30, 2023.”
However, the FASB indicated, it believes more time is needed by preparers to deal with the accounting implications of the changeover. But, the ASU released Wednesday by FASB does not change the complete phase-out of the reference rate at the middle of next year. It only extends the effective date of the guidance.
“To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848,” FASB wrote.
FASB ASU 2022-06: Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848