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FASB to tap state societies to bolster awareness of accounting changes for LIBOR phaseout

Financial Accounting Standards Board (FASB) Chairman Russell Golden said the board will get the help of state societies to generate awareness about forthcoming accounting changes stemming from rate reform, a global regulatory change with broad financial reporting implications for some registrants.

The board plans to issue accounting rules early next year to facilitate the effects of the transition away from the London Interbank Offered Rate (LIBOR) to other rates.

“It’s a unique situation – we have plans to blast it out through the state societies,” Golden said of the rules at the Dec. 17, 2019, joint meeting of the Small Business Advisory Committee (SBAC) and the Private Company Council (PCC). “Unlike when we make an accounting change we give you time to process and think about the change, in this case because the transactions are being modified today, we need to get relief out so it can be utilized,” he said.

The FASB set the end date for the rules at Jan. 1, 2023, because most contracts with expired rate reform references would need to be altered by then.

There are trillions of dollars of loans, derivatives and financial contracts that are tied to LIBOR, and therefore revisions to GAAP is of major importance to all companies that have loans on debt on their books.

“And so if you have hedges, financing agreements that are based on LIBOR, it’s our understanding that will be changing over the next two years, and so the sooner you can think about that from an economic standpoint, from a financial standpoint in negotiations, the better off you are,” said Golden. “But this relief is scheduled to end.”

The accounting rules are primarily going to be driven from a company’s finance function to its controller function, said Golden. “It’s usually led by the bank, I would expect your bankers to be leading it – not your accounting firm,” he said.

Small public companies, like private companies, have been slow to react to the changes, mostly taking a “wait and see” posture, discussions at the board’s various prior advisory meetings have indicated.

Asked by FASB member Susan Cosper whether small public companies are experiencing the same lack of awareness as private companies, an SBAC member said there has not been much discussion around the topic.

“There hasn’t been very much discussion from our external auditor at this point, we know it’s out there – for us a lot of it has to do with how it affects our credit agreements,” Scott Gray, senior vice president and chief financial officer at Luby’s, Inc., said. “We have language in our credit agreement that allows the previous GAAP to apply for a period of time, said Gray. “We’re watching closely.”

Proposed Accounting Standards Update (ASU) No. 2019-770, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, was issued by the FASB early September. The proposal will help companies avoid having to utilize complex and costly accounting approaches to modify their contracts so that references to LIBOR and other newly extinct reference rates can be replaced. It also allows them to preserve the hedging strategies they have set up.

The FASB, by a 4 to 3 majority, voted in November to finalize its proposal. Dissenting board members said they are concerned that the proposal would not provide investors with sufficient information to enable them to understand current holdings affected by reference rate reform and the effects of hedge accounting expedients.

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