Read this if your organization operates under the Governmental Accounting Standards Board (GASB).
Governmental Accounting Standards Board (GASB) Statement No. 93 Replacement of Interbank Offered Rates
Summary
With the global reference rate reform and the London Interbank Offered Rate (LIBOR) disappearing at the end of 2021, GASB Statement No. 93 was issued to address the accounting and financial impacts for replacing a reference rate.
The article below is focused on Hedging Derivative Investments and amendments impacting Statement No. 87, Leases. We have not included guidance related to the Secured Overnight Financing Rate or the Up-Front Payments.
Background
We have all heard that by the end of 2021, LIBOR will cease to exist in its current form. LIBOR is one of the most commonly used interbank offered rates (IBOR). Now what?
In March 2020, the GASB provided guidance to address the accounting treatment and financial reporting impacts of the replacement of IBORs with other referenced rates while maintaining reliable and comparable information. Statement No. 93 specifically addresses previously issued Statements No. 53, Accounting and Financial Reporting for Derivative Instruments, and No. 87, Leases, to provide updated guidance on how a change to the reference rate impacts the accounting for hedging transactions and leases.
Here are our analyses of what is changing as well as easy-to-understand and important considerations for your organization as you implement the new standards.
Part 1: Hedging Derivative Instruments
The original guidance under Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, as amended, requires that a government terminate a hedging transaction if the government renegotiates or amends a critical term of a hedging derivative instruction.
Reference rate is the critical term that differentiates Statement No. 93 from Statement No. 53. The newly issued Statement No. 93 provides an exception that allows for certain hedging instruments to hedge the required accounting termination provisions when the IBOR is replaced with a new reference rate.
In order words, under Statement No. 53, a modification of the IBOR would have caused the hedging instrument to terminate. However, Statement No. 93 now provides an exception to the termination rules as a result of the end of LIBOR. According to Statement No. 93, the exception is allowable when:
- The hedging derivative instrument is amended or replaced to change the reference rate of the hedging derivative instrument’s variable payment or to add or change fallback provisions related to the reference rate of the variable payment.
- The reference rate of the amended or replacement hedging derivative instrument’s variable payment essentially equates to the reference rate of the original hedging derivative instrument’s variable payment by one or both of the following methods:
- The replacement rate is multiplied by a coefficient or adjusted by addition or subtraction of a constant; the amount of the coefficient or constant is limited to what is necessary to essentially equate the replacement rate and the original rate
- An up-front payment is made between the parties; the amount of the payment is limited to what is necessary to essentially equate the replacement rate and the original rate.
- If the replacement of the reference rate is effectuated by ending the original hedging derivative instrument and entering into a replacement hedging derivative instrument, those transactions occur on the same date.
- Other terms that affect changes in fair values and cash flows in the original and amended or replacement hedging derivative instruments are identical, except for the term changes, as specified in number 1 below, that may be necessary for the replacement of the reference rate.
As noted above, there are term changes that may be necessary for the replacement of the reference rate are limited to the following:
- The frequency with which the rate of the variable payment resets
- The dates on which the rate resets
- The methodology for resetting the rate
- The dates on which periodic payments are made.
Many contracts that will be impacted by LIBOR will be covered under Statement No. 93. The statement was created in order to ease with the transition and not create unnecessary burdens on the organizations.
Part 2: Leases
Under the original guidance of Statement No. 87 Leases, lease contracts could be amended while the contract was in effect. This was considered a lease modification. In addition, the guidance states that an amendment to the contract during the reporting period would result in a separate lease. Examples of such an amendment included change in price, length, or the underlying asset.
Included within Statement No. 93, are modifications to the lease standard as it relates to LIBOR. In situations where a contract contains variable payments with an IBOR, an amendment to replace IBOR with another rate by either changing the rate or adding or changing the fallback provisions related to the rate is not considered a lease modification. This modification does not require a separate lease.
When is Statement No. 93 effective for me?
The removal of LIBOR as an appropriate interest rate is effective for reporting periods ending after June 31, 2021. All other requirements of Statement No. 93 are effective for all reporting periods beginning after June 15, 2022. Early adoption is allowed and encouraged.
What should I do next?
We encourage all those that may be impacted by LIBOR—whether with hedging derivative instruments, leases, and/or specific debt arrangements—to review all of their instruments to determine the specific impact on your organization. This process will be time consuming, and may require communication with the organizations with whom you are contracted to modify the terms so that they are agreeable to both parties.
If you would like more information about early adoption, or implementing the new Hedging Derivative Instruments or Leases, please contact Katy Balukas or Grant Ballantyne.