New accounting standards you should know, Part 5: Farewell to LIBOR

For anybody in the accounting world, one thing is clear: accounting standards never stay the same. In this multi-part series, “New accounting standards you should know,” I will catch you up on the latest accounting standard updates. Previously, we examined the latest updates for business combination accounting (ASC 805). For our final article of the series, let’s talk about the end of LIBOR.

There has been a great deal of contention in the finance world around the use of the London Inter-Bank Offered Rate (LIBOR). LIBOR is an index that is used in many avenues of the finance world. Loans, financial instruments, and lease arrangements base their variable interest rates on a change in LIBOR (e.g., LIBOR + 3%). However, its use has become more controversial, as it’s subject to manipulation through various methods. As a result, the financial world is transitioning financing arrangements away from LIBOR and towards other, more objective measures, such as the Secured Overnight Financing Rate (SOFR) or Sterling Overnight Interbank Average Rate (SONIA). (And yes, Libor, Sofr, and Sonia could be great characters for the next Thor movie, but I digress.)

While the ongoing transition away from LIBOR does not trigger an accounting change in itself, the transition affects any agreements or contracts that are required to be modified to utilize an index other than LIBOR. This could result in a debt modification/extinguishment event for existing debt, or a lease modification/reassessment event under ASC 842 for existing leases. The FASB has released guidance to provide some relief around some of these anticipated changes for companies. However, at minimum, companies should be aware of this transition away from LIBOR, and be proactive in their structure of future contracts to minimize the need for modification of effective arrangements (and the resulting accounting treatment).

The end of LIBOR is coming quickly; in fact, it’s already here. The reporting of non-USD LIBOR rates is already being phased out as of December 31, 2021. While USD LIBOR rates get a bit more time (until June 30, 2023), that deadline will approach far too soon, considering the vast amount of agreements that involves the use of LIBOR.

Congratulations! You are now an expert in new accounting standards!

That was a lie! But hopefully this series of Zeroed-Insights have helped you better arm yourself knowing what you don’t know. The barrage of changes and updates to standards might seem daunting, but you can take comfort that there are many different resources available, in the form of practice aids, guides, as well as accounting experts to assist if reading US GAAP guidance isn’t really your thing.

Who knows why the accounting world likes to constantly shake things up? And who knows what new surprises will come our way even in the next year (cryptocurrency guidance, anyone?)? If you’re trying to stay on top of the latest guidance and avoid surprise audit adjustments, save yourself countless headaches by reaching out to a technical accounting expert and having them advise you on all of the new accounting changes on the horizon.