The Financial Accounting Standards Board has issued Accounting Standards Update No. 2020-04 to provide optional guidance for accounting for the transition away from the expiring London Interbank Offered Rate (LIBOR) and other reference rates to new benchmark rates. The ASU, which is temporary and only in effect during the reference rate transition period through Dec. 31, 2022, is intended to reduce the costs and complexities of accounting for reference rate reform.

“This new ASU addresses operational challenges stakeholders raised with the Board and will help simplify matters going forward,” said FASB Chairman Russ Golden. “At the same time, the new guidance will also help reduce transition-related costs.”

LIBOR is set to expire at the end of 2021. Regulators in the United States and around the world have undertaken reform initiatives to replace LIBOR and other interbank offered rates and identify alternative reference rates that are more observable or transaction-based and less susceptible to interest rate manipulation. LIBOR and other interbank offered rates are widely used benchmark or reference rates in financial contracts worldwide, including loans, derivatives, and leases.

Contracts affected by the rate changes would be required to be modified. Under prior GAAP, those modifications would have to be evaluated to determine whether they resulted in new contracts or continuation of the existing contracts.

FASB received concerns about the volume of contracts and arrangements that would be affected and the cost and burden of having to evaluate them in a short period of time. There were also concerns raised that changes in reference rates could result in the inability to apply hedge accounting or cause hedge relationships not to qualify as highly effective during the transition period. In late 2018, FASB initiated a project to address the accounting challenges from this transition.

The ASU provides exceptions and optional expedients for applying GAAP to contract modifications, hedging relationships, and other transactions that reference LIBOR or other reference rates to be discontinued as a result of reference rate reform. They do not apply to modifications made or hedges entered into or evaluated after Dec. 31, 2022, unless the hedging relationships existed as of that date and optional expedients for them were elected and retained through the end of the hedging relationship.

FASB previously amended its hedge accounting standard to permit the Fed-backed Secured Overnight Financing Rate (SOFR) as an alternative to LIBOR. SOFR is the favorite to replace LIBOR, with Fannie Mae and Freddie Mac among those to already transition to the new rate.

ASU 2020-04, and a “FASB in Focus” overview of the new guidance, are available at