The Financial Accounting Standards Board released an accounting standards update Thursday offering temporary optional guidance to help with the accounting for reference rate reform, as many organizations move away from the London Interbank Offered Rate, or LIBOR, to newer reference rates like the Secured Overnight Financing Rate, or SOFR.

Regulators have been pressing banks and other financial institutions to make the transition from LIBOR to SOFR after a scandal erupted in 2012 exposing how traders at several major banks had been routinely manipulating LIBOR for years to increase their profits.

The new guidance offers some optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate that is expected to be discontinued.

The reference rates are what banks use to make short-term loans to each other and help determine the basis on which they make loans to their customers. Trillions of dollars in loans, derivatives and other financial contracts make reference to LIBOR. The global capital markets are expected to move away from LIBOR and other interbank offered rates toward rates like SOFR that are considered to be more observable or transaction-based and less susceptible to manipulation.

The standards update aims to help stakeholders during the global market-wide reference rate transition period and thus will be in effect for a limited time through Dec. 31, 2022.

FASB started a project in 2018 to address the potential accounting challenges expected to arise from the transition. It proposed an accounting standards update last September to aid with the transition (see our story).

“This new ASU provides stakeholders with the guidance they need to ease the process of migrating away from LIBOR and other interbank offered rates to new reference rates,” said FASB chairman Russell Golden (pictured) in a statement Thursday. “It addresses operational challenges stakeholders raised with the board and will help simplify matters going forward. At the same time, the new guidance will also help reduce transition-related costs.”

The accounting standards update, along with a FASB in Focus overview, is available at www.fasb.org.