Without going back into a lot of history, the “scandal” in the early 2000’s surrounding several banks manipulating LIBOR has resulted in a very real likelihood that when the obligation banks have to provide information to determine LIBOR expires, this index rate may “disappear”. Given the number of instruments and number of markets that use LIBOR, the transition from this rate to some other reference rate has the potential to create significant risks and cause significant disruption.
Both the SEC and the FASB have been working on guidance to assist companies in their disclosure and reporting obligations before, during, and after this potential transition.
On July 12, 2019, the SEC published a “Staff Statement on LIBOR Transition”. The Staff Statement addresses several issues companies may want to consider in managing this transition including addressing risks in existing contracts, processes for new contracts, IT considerations, and impact on risk management practices. The Staff Statement also reviews disclosure considerations for companies before, during, and after a transition.
In addition, the FASB has undertaken a project and on September 5, 2029 issued a proposed ASU to provide accounting and reporting relief will be appropriate for this transition. The project summary is available here, and the proposed ASU is available here. While no decisions are final, the Board is considering relief for hedging relationships and whether such a change in reference rate could be a debt modification.
In case you are not familiar with one of the likely new reference rates, “SOFR” or Secured Overnight Financing Rate, here is information about this rate from the Federal Reserve Bank of New York.
As we approach third quarter-end and year-end, these resources hopefully provide helpful information as we evaluate the impact of this risk of change.
As always, your thoughts and comments are welcome!