Reference Rate Reform
What is reference rate reform?
Currently, LIBOR is the most commonly used reference rate in the global financial markets. However, concerns about the sustainability of LIBOR and other IBORs globally has led to an effort to identify alternative reference rates prior to late 2021, when LIBOR may no longer be used as an international benchmark.
In the United States, the Alternative Reference Rates Committee convened by the Federal Reserve has identified the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate to U.S. dollar LIBOR.
Because the long-standing use of LIBOR as an international benchmark will likely cease in late 2021, the GASB has taken proactive steps to stay ahead of the migration away from LIBOR to an alternate benchmark.
Why did the GASB add this project to the agenda?Some state and local governments have entered into hedging derivative instruments and lease contracts that reference LIBOR.
The Board recognized that transitioning away from LIBOR will not only be a significant undertaking for any government engaged in such contracts but also may have substantial accounting and financial reporting implications. The GASB added a project to its agenda in December 2018 to look at the areas of its standards that are expected to be impacted by the transition.
The full name of the project is Secured Overnight Financing Rate—London Interbank Offered Rate Replacement, but we call it “SOFR” for short.