Reference Rate Reform

What is reference rate reform?

Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate—or LIBOR—and other interbank offered rates (IBORs), and toward new reference rates that are more reliable and robust.

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.

What is the Statement’s Objective?

Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, previously required a government to terminate hedge accounting when it changes the reference rate of a hedging derivative instrument’s variable payment. In addition, Statement No. 87, Leases, previously required a government that replaced the rate on which variable payments depend in a lease contract to apply the provisions for lease modifications, including remeasurement of the lease liability or lease receivable.
The objective of Statement 93 is to address those and other accounting and financial reporting implications of the replacement of an IBOR by:
  • Providing exceptions for certain hedging derivative instruments to the hedge accounting termination provisions when an IBOR is replaced as the reference rate of the hedging derivative instrument’s variable payment
  • Clarifying the hedge accounting termination provisions when a hedged item is amended to replace the reference rate
  • Clarifying that the uncertainty related to the continued availability of IBORs does not, by itself, affect the assessment of whether the occurrence of a hedged expected transaction is probable
  • Removing LIBOR as an appropriate benchmark interest rate for the qualitative evaluation of the effectiveness of an interest rate swap
  • Identifying the Secured Overnight Financing Rate and the Effective Federal Funds Rate as appropriate benchmark interest rates for the qualitative evaluation of the effectiveness of an interest rate swap
Providing an exception to the lease modifications guidance in Statement 87 for certain lease contracts that are amended solely to replace an IBOR as the rate upon which variable payments depend.

What is Next?

Statement No.  is 93 available for download at no charge from the GASB website. Printed copies of the Statement are also available for purchase in the GASB Store.

The removal of LIBOR as an appropriate benchmark interest rate is effective for reporting periods ending after December 31, 2021. All other requirements of Statement 93 are effective for reporting periods beginning after June 15, 2020. Earlier application is encouraged.