The end of LIBOR: Potential costly surprises and related accounting matters

In Part I of this series, we detail the economic issues caused by the planned discontinuance of LIBOR for entities using LIBOR as a reference rate including significantly higher interest cost and uncertainties about how interest rate swap derivatives currently using LIBOR will price. LIBOR is widely used in the United States (U.S.) to price commercial loans and interest rate swap derivatives. Part I also considers the issues with LIBOR replacements such as SOFR and the need for robust fallback language in contracts.

In Part II, we change our focus to discuss the related accounting matters as a result of the discontinuation of LIBOR. These areas include the accounting implications of LIBOR replacements on:

• Loan modifications and existing cash flow hedge relationships.

• Use of LIBOR as a reference rate in leases which can cause accounting issues related to lease modifications under FASB Accounting Standards Codification (FASB ASC) 842, Leases.

• Use of LIBOR as a reference rate in contracts with customers, which can cause accounting issues related to contract modifications under FASB ASC 606, Revenue for Contracts with Customers.

• Use of LIBOR in existing fair value hedge relationships as a benchmark reference rate.