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Minutes Archive
Secured Overnight Financing Rate—London Interbank Offered Rate Replacement
Minutes of Meetings, February 11–13, 2020
The Board further discussed two-step transitions from an Interbank Offered Rate (IBOR) to a Secured Overnight Financing Rate (SOFR) and up-front payments that are limited to what is necessary to essentially equate the replacement rate and the original rate. The Board tentatively decided that the exceptions to termination of hedge accounting should restrict the reference rate of the amended or replacement hedging derivative instrument’s variable payment in the second step of two-step transitions to one that is based on a SOFR. The Board also tentatively decided that an up-front payment that is limited to what is necessary to essentially equate the replacement rate and the original rate should be reported as an asset or a liability and recognized using the interest method over the duration of the related hedging derivative instrument. In addition, the Board tentatively decided that for the purpose of applying one of the quantitative methods to evaluate effectiveness, an up-front payment that is limited to what is necessary to essentially equate the replacement rate and the original rate should be considered a cash flow over the duration of the related hedging derivative instrument.
The Board then reviewed a preballot draft of the final Statement, Replacement of Interbank Offered Rates, and discussed clarifying edits. The Board agreed to move forward with a ballot draft of the final Statement, which will be discussed at the March 2020 Board meeting.
Next, the Board discussed whether the expected benefits resulting from the application of the financial reporting requirements justify the perceived costs to preparers and other stakeholders. The Board tentatively decided that the expected benefits associated with the Statement justify the perceived costs of implementation and ongoing compliance of the resulting accounting standards.
Finally, the Board discussed the characteristics of the financial information that would be included in the final Statement. The Board tentatively agreed that the financial reporting requirements in the Statement meet all of the characteristics in Group 1 and, therefore, are within the scope of the GASB’s authority.
Minutes of Meeting, January 7–9, 2020
The Board began redeliberations based on stakeholder feedback received on the Exposure Draft, Replacement of Interbank Offered Rates, and discussed issues in relation to the feedback.
The Board first redeliberated on the scope and applicability of the proposed Statement. The Board tentatively decided to clarify the scope in the final Statement as follows:
This Statement establishes accounting and financial reporting requirements related to the replacement of IBORs in hedging derivative instruments and leases. It also
The Board then addressed comments related to the exception to termination of hedge accounting. The Board tentatively decided that modifications should not be made to the provisions presented in paragraph 4 of the Exposure Draft to further clarify that the continuation of hedge accounting should be limited to those circumstances in which an existing effective hedging relationship continues. The Board also tentatively decided that a one-year exception to the hedge effectiveness requirement for hedging derivative instruments that are effective at the time of reference rate replacement should not be provided in the final Statement. In addition, the Board tentatively decided that the exception to termination of hedge accounting should not be broadened to include the potential discontinuation of other rates in the future in the final Statement.
Two-step transitions to SOFR and up-front payments then were discussed by the Board. The Board tentatively decided that the exception to termination of hedge accounting in the final Statement should be broadened to include two-step transitions to SOFR when (a) the reference rate of the original hedging derivative instrument’s variable payment is a reference rate that replaced an IBOR-based rate in the previous amendment or replacement and (b) all of the criteria in paragraphs 4a–4d of the Exposure Draft are met. In addition, the Board tentatively decided that the exception to termination of hedge accounting should be broadened in the final Statement to encompass the circumstance in which a government needs to make or receive an up-front payment, in addition to adjusting the replacement rate by a coefficient or a constant, in order for the replacement and original rates to essentially equate.
The Board also discussed stakeholder feedback related to other critical term changes. The Board tentatively decided that no additional term changes should be included in the list of term changes that may be necessary for the replacement of the reference rate. The Board also tentatively decided that additional guidance should not be provided to clarify what is meant by essentially equate. The Board tentatively decided that additional time between when the original hedging derivative instrument is ended and when the replacement hedging derivative instrument is entered into should not be included as an exception to termination of hedge accounting in the final Statement.
Next, the Board discussed stakeholder feedback related to in-substance defeasance of hedged debt, the amendment to the Glossary of Statement 53, and the effective date. The Board tentatively decided that an exception should not be provided to the Statement 53 requirement that hedge accounting cease to be applied when hedged debt is defeased as a result of a current refunding or an advance refunding resulting in an in-substance defeasance. The Board also tentatively agreed that definitions of additional terms used within the guidance should not be provided in the final Statement. The Board tentatively decided to modify the effective date as follows:
The requirements of this Statement, except for paragraph 8b, are effective for reporting periods beginning after June 15, 2020. The requirements in paragraph 8b are effective for reporting periods
The Board also discussed the clarification of the hedge accounting termination provisions when an IBOR is replaced as the reference rate of a hedged item, probability of expected transactions, appropriate benchmark interest rates, the amendment to the Glossary of Statement 53 presented in paragraph 9 of the Exposure Draft, lease modifications, and transition provisions based on stakeholder feedback. The Board tentatively decided to carry forward the provisions presented in paragraphs 6–11 and 13 of the Exposure Draft to the final Statement.
Minutes of Teleconference, September 16, 2019
The Board reviewed a ballot draft of an Exposure Draft of a proposed Statement,
Replacement of Interbank Offered Rates, and discussed clarifying edits. The Board then voted unanimously to approve the issuance of the Exposure Draft.
Minutes of Meeting, August 27–28, 2019
First, the Board discussed a modification to a tentative decision related to the use of the term essential to describe critical term changes that are permitted to be made in a hedging derivative instrument, for purposes of applying the proposed exception to termination of hedge accounting. The Board tentatively agreed that if the reference rate of the replacement hedging derivative instrument’s variable payment is multiplied by a coefficient or adjusted by addition or subtraction of a constant, it should be proposed to be limited to what is necessary to essentially equate the replacement rate and the original rate. The Board also tentatively agreed that the terms that affect changes in fair values and cash flows in the original and replacement hedging derivative instrument should be proposed to be identical, except for term changes that may be necessary for the replacement of the reference rate. The Board then tentatively decided that if the reference rate of a hedged item is an IBOR, an IBOR multiplied by a coefficient, or an IBOR adjusted by addition or subtraction of a constant, an amendment of the hedged item to replace the reference rate with another reference rate, which is adjusted to substantively equate the replacement rate and the original rate, is not a termination event for the purpose of applying paragraph 22 of Statement 53. In addition, the Board tentatively decided that the addition of an interest rate cap or floor should not be considered a critical term change that may be necessary for the replacement of the reference rate.
The Board then reviewed a preballot draft of an Exposure Draft of a proposed Statement, Replacement of Interbank Offered Rates, and discussed clarifying edits. The Board agreed to move forward with a ballot draft of an Exposure Draft of a proposed Statement that will be discussed at the September 2019 teleconference.
Minutes of Teleconference, August 5, 2019
The Board continued deliberations on the Secured Overnight Financing Rate—London Interbank Offered Rate Replacement project by first discussing the timing of the effectiveness evaluation. Regarding the proposed exception for certain hedging derivative instruments to the hedge accounting termination provisions, the Board tentatively decided that an evaluation of effectiveness should not be required at the time of reference rate replacement.
The Board then discussed critical term changes that would and would not be examples of changes that are essential to or related to the replacement of a reference rate. The Board tentatively decided that a reference rate should be included in the Exposure Draft as a critical term change that is essential to the replacement of a reference rate. The Board also tentatively decided that spread or coefficient adjustments should be included in the Exposure Draft as a critical term change that is essential to the replacement of a reference rate, provided that the amount of the adjustment is limited to what is needed to equate the replacement rate and the original rate. In addition, the Board tentatively decided that reset period, reset dates, or repricing calculations should be included in the Exposure Draft as critical term changes that may be essential to the replacement of a reference rate. Lastly, the Board tentatively decided that notional amount and term to maturity are critical term changes that are not essential to the replacement of a reference rate.
Next, the Board discussed potential transition guidance, a proposed effective date, and the Exposure Draft’s comment period. The Board tentatively decided to propose that the removal of LIBOR as an appropriate benchmark interest rate become effective for reporting periods that begin after December 15, 2020. The Board tentatively decided to propose that all other provisions of the Statement be effective for reporting periods beginning after June 15, 2020. Moreover, the Board tentatively decided to propose that the effective date provisions of the SOFR–LIBOR Replacement standards encourage earlier implementation.
In addition, the Board tentatively decided that the comment period should be approximately 60 days, with a deadline of November 27, 2019.
The Board tentatively agreed that the expected benefits of the proposed SOFR–LIBOR Replacement guidance justify the perceived costs of implementation and ongoing compliance. In addition, the Board tentatively decided that the proposed requirements to be included in the Exposure Draft meet all of the characteristics of Group 1.
Minutes of Meeting, July 16–18, 2019
The Board continued deliberations on the LIBOR replacement project, first discussing whether guidance should be provided specific to lease modifications. The Board tentatively decided to propose an exception to the lease modification guidance for contracts amended only to change the index rate upon which variable payments depend. The Board then discussed three alternatives regarding the scope of the lease modification guidance exception and tentatively decided to propose that the scope of the exception be limited to circumstances in which the original contract references an interbank offered rate (IBOR) or a rate based on an IBOR—the moderate approach.
Additionally, the Board tentatively agreed to propose guidance that a government assume that the reference rate on which the hedged cash flows are based is not altered as a result of reference rate reform, for purposes of determining whether an expected transaction is probable of occurring.
The Board then discussed the application of hedge accounting termination provisions and tentatively decided to propose an exception to the hedge accounting termination provisions for certain hedging derivative instruments. Furthermore, the Board tentatively decided to propose that the exception be limited to hedging derivative instruments that continue to be effective and the scope of the proposed exception be limited to circumstances in which the original hedging derivative instrument references an IBOR or a rate based on an IBOR. In addition, the Board tentatively decided not to propose specific guidance on which reference rates may be selected as a replacement. The Board also tentatively decided to propose that if the replacement is effectuated by ending the original hedging derivative instrument and entering into a new hedging derivative instrument, those transactions be required to be ended and entered into on the same date. Lastly, the Board tentatively agreed to propose that critical term changes that are either essential to or related to the replacement of a reference rate be permitted.
Minutes of Teleconference, May 13, 2019
The Board continued deliberations on the Secured Overnight Financing Rate—London Interbank Offered Rate Replacement project by first discussing characteristics of a benchmark interest rate. The Board tentatively decided to retain the existing approach of specifying which rates are appropriate benchmark interest rates for the application of the consistent critical terms method.
The Board then discussed alternative reference rates and tentatively decided that the Effective Federal Funds Rate and the Secured Overnight Financing Rate (SOFR) should be proposed as appropriate benchmark interest rates for taxable debt. Additionally, the Board tentatively agreed that the derivative instruments guidance permits a more generic swap rate based on SOFR. The Board also tentatively decided that a nearly risk-free rate that is adjusted with a spread should not be considered an appropriate benchmark interest rate. Lastly, the Board tentatively decided that LIBOR should be removed from the derivative instruments guidance as an appropriate benchmark interest rate for taxable debt.
Minutes of Teleconference, April 1, 2019
The Board began deliberations on the Secured Overnight Financing Rate—London Interbank Offered Rate Replacement project by discussing background information on benchmark interest rate reform. The Board then discussed potential amendments to Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, and tentatively decided to propose that paragraph 9 of that Statement be amended to remove the specific examples: “Common reference rates are the London Interbank Offered Rate (LIBOR), the Securities Industry and Financial Markets Association (SIFMA) swap index, the AAA general obligations index published by Municipal Market Data, or a commodity pricing point. For example, a commodity swap’s variable payment may be linked to the price of No. 2 heating oil at the New York City harbor price point.” Additionally, the Board tentatively decided to propose that the first sentence of the definition of reference rate in the Glossary of Statement 53 be replaced with the following to be more consistent with the FASB’s definition of underlying: “A specified interest rate, security price, commodity price, foreign exchange rate, index or prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event, such as a scheduled payment under a contract). A reference rate may be a price or rate of an asset or liability but is not the asset or liability itself. A reference rate is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument.” Furthermore, the Board tentatively decided to propose that the definition of reference rate in the Glossary of Statement 53 be amended to remove the following two sentences: “Common reference rates are LIBOR, the SIFMA swap index, the AAA general obligations index, and the pricing point of a commodity. For example, a commodity swap’s variable payment may be linked to the price of No. 2 heating oil at the New York harbor pricing point.” Lastly, the Board tentatively decided to propose that the last sentence of the definition of a reference rate in the Glossary of Statement 53 be amended as follows: “Other literature may refer to a reference rate as a reference index or underlying” and that the Glossary of Statement 53 should be amended to remove the definition of underlyings.
Next, the Board discussed the specification of benchmark interest rates in accounting literature and tentatively decided that a benchmark interest rate should be viewed as a market-driven rate. Lastly, the Board decided that the potential characteristics of a benchmark interest rate should be further developed for Board consideration.