Thomson Reuters asks Brittany Jervis about the FASB extending accounting rules to ease the shift from LIBOR
Summary
Brittany Jervis speaks with Thomson Reuters as the FASB temporarily extends accounting relief for companies shifting from the use of LIBOR.
Brittany Jervis in Thomson Reuters“For those who adopt the standard fallback language, the debt will likely transition to Term SOFR, while the hedges transition to Daily Simple SOFR, creating an economic mismatch between the two.”
At the end of 2022, the FASB published a two-year extension to the temporary accounting relief guidance (Topic 815, Reference Rate Reform) to entities transitioning from LIBOR.
“SOFR trading volume is increasing,” Brittany Jervis, accounting advisory at Chatham Financial, said. “Especially in the U.S., when companies are refinancing, they are not refinancing to LIBOR anymore,” she said. “They’re now hedging based on those Term SOFR and Daily SOFR indexes, which is providing more and more liquidity in the market, so we’re certainly seeing that shift away from LIBOR.”
Topic 815 also allows companies to ignore accounting mismatches that occur during the rate transition. “And it allows them to continue a previously perfectly effective hedging relationship until both the debt and the derivatives are transitioned to a new reference rate,” she said.
Treasury and accounting must keep in mind, however, that ASC 848 protection does not extend to debt and derivatives that fall back to SOFR, Jervis added. “For those who adopt the standard fallback language, the debt will likely transition to Term SOFR, while the hedges transition to Daily Simple SOFR, creating an economic mismatch between the two.”
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