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Chatham's Brittany Jervis explains to NeuGroup how the FASB offers corporates operational relief in the LIBOR transition

Date:
January 26, 2021
Source:
NeuGroup

Summary

The Financial Accounting Standards Board (FASB) started 2021 by clarifying accounting guidance aimed at facilitating the transition of corporate floating-rate transactions away from the LIBOR reference rate. Brittany Jervis spoke with NeuGroup Insights about how the FASB's ASU 2021-01 and the guidance issued under Topic 848 provide corporates with operational relief as they pursue transactions.

“The ASU allows companies to make an optional election that permits them to continue with the original designation,” Ms. Jervis said. “So any of these trades that previously qualified as net investment hedges would continue to qualify and would not need to be de-designated and marked to market.”

NeuGroup

Saving net investment hedges. Stakeholders also raised concerns that “float-to-float” cross-currency swaps involving receive-variable rate and pay-variable rate legs could, under reference-rate reform, lead to a difference in repricing dates and intervals, disqualifying certain net investment hedges. The recent ASU clarifies that the discrepancy can be disregarded.

  • “The ASU allows companies to make an optional election that permits them to continue with the original designation,” Ms. Jervis said. “So any of these trades that previously qualified as net investment hedges would continue to qualify and would not need to be de-designated and marked to market.”

What to watch out for. Under the original Libor cessation date, FASB’s Topic 848 guidance had a sunset date of Dec. 31, 2022. The ICE Benchmark Administration’s current proposal to extend support of LIBOR to June 30, 2023 would give corporate treasury more time to transition existing financial products priced over Libor to SOFR or other alternative reference rates. FASB is expected to consider pushing the sunset date of its guidance past that.

Chatham Financial corporate treasury advisory

Chatham Financial partners with corporate treasury teams to develop and execute financial risk management strategies that align with your organization’s objectives. Our full range of services includes risk management strategy development, risk quantification, exposure management (interest rate, currency and commodity), outsourced execution, technology solutions, and hedge accounting. We work with treasury teams to develop, evaluate, and enhance their risk management programs and to articulate the costs and benefits of strategic decisions.