University Accounting Theory Report: LIBOR, GAAP Analysis (ACC341)

This report delves into critical accounting issues, primarily focusing on the transition away from LIBOR and the implications of proposed GAAP updates. The first part of the report analyzes an article discussing the complexities of LIBOR's abolishment, its impact on corporate borrowers, and the emergence of alternative reference rates like SONIA and SOFR. It critically evaluates the article's recommendations, particularly the adoption of RFRs and the hardwired approach, highlighting potential shortcomings such as the failure of RFRs to reflect bank funding costs. The second part examines an exposure draft by the Financial Accounting Standards Board (FASB) proposing updates to the accounting standards codification. It explores the major provisions of the amendments, aimed at improving GAAP understanding and codification, and analyzes the interpretations of comment letters submitted by stakeholders. The report uses theories such as the Public Interest Theory and Private Interest Theory to provide a critical analysis of the proposed amendments and their potential impact on financial reporting. It concludes by synthesizing the key issues and providing a comprehensive overview of the accounting challenges discussed.

ACCOUNTING THEORY
ACC341

Table of Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
Major issues in the article............................................................................................................3
Linkage to major issues...............................................................................................................3
Critical Analysis...........................................................................................................................4
QUESTION 2...................................................................................................................................5
Major issue in the exposure draft.................................................................................................5
Interpretation of Comment letters................................................................................................6
Critical Analysis using theories...................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................1
BIBLIOGRAPHY............................................................................................................................4

INTRODUCTION
The accounting and finance norms are consistently changing and in the following report a recent
accounting issue will be evaluated along with the evaluation of an proposed exposure by the
accounting regulators.
QUESTION 1
Major issues in the article
The article that has been selected, published by Global Compliance news, discusses the
issue of LIBOR and the impact of its abolishment in Corporate Borrowers (LIBOR Transition:
What Now for Corporate Borrowers?, 2019). It cannot be denied that LIBOR is deeply
embedded in the global trade and exchange of currencies where it is difficult to ascertain the
complexity that arises with its abolishment from the year 2021. This will allow smooth transition
of the LIBOR to implementation of SONIA (Crabb, 2018). The declining transition time has led
to the increased uncertainty where the market participants are confused regarding what should
they do and there is a lack of any clarity or specific format which they should follow. Although,
there has been much work done in order to transit from LIBOR to SONIA, which is treated as a
much better interest rate taking into account all the factors, yet there is much work yet to be
accomplished. The article categorizes the entire issue of LIBOR abolishment into two major
aspects where the impact of LIBOR replacement has been explained for the corporate dealers
and how they can trade in the future using different replacements rates that have emerged, the
most significant and dominant one being SONIA i.e. Sterling Overnight Index Average, which
has been in operation since 1997 (Zhu, 2019)). The benefits of using different Risk Free Rates
(RFRs) as a replacement for LIBOR and the manner in which debt financing can be generated in
the future.
Linkage to major issues
There are different interests rates that are being used as the replacement currently for the LIBOR
where countries are using their own currency rates such as sterling, US Dollar, yen etc. The new
regulatory standards that have been set up were being met by these new interest rates and
therefore, the implementation of these RFRs is the first step of transition. SOFR was the RFS of
USD and similarly SONIA was the RFR for Sterling (Siboulet and et.al. 2019). However, this
trend of using different RFS by different countries has led to increase in the ambiguity that exists
while trading between different countries and this had led to the corporate borrowers requesting

for forward term rates who would work as per the maturity structure that was implemented under
LIBOR. The regulators of the global market are urging the market participants all over the world
to develop the forward term benchmarks that assist in maintaining the amount of liquidity in the
trading and also the rates are much closer to the currency levels. There were two major
approaches that were developed for the development of fallback provisions i.e. the amendment
approach and the hardwired approach. Amendment approach will help both lenders and
borrowers in negotiating a replacement rate for a future debt contracts and the hardwired
approach helps in formulation of that replacement rate that would not be amended in the future
contracts.
Another major issue discussed in the article is what would be the fallback provisions if the
LIBOR was found to be dissolved today out of the approaches discussed above, which one
would be the best approach. The ARRC of US has recommended a compounded SOFR, which
would be supplied with the hardwired approach as the best replacement that would ensure
compliance as well. Thus, the development of a forward term benchmark that is based on the
RFR would b the most preferred rate (Williams, 2019). This type of rate helps in hedging the
LIBOR transition risk and many financial institutions have developed significant arbitrage
opportunities with the help of such rates. It is expected that the RFR linked with forward term
rate and its implementation can be effectively used as a substitute for the consistent confusion
and the haze of dilemma that surround the transition of LIBOR and the uncertainty regarding
how it will be done effectively.
Critical Analysis
The article presents some very strong finding and recommendation where the points that have
been presented are valid, strong and practical, i.e. they can be implemented in a practical
environment. The article suggests that in case the LIBOR is to fall back today, then the
propositions that can be adopted mainly involve development of the RFRs with the integration of
the hardwired approach that will helps in transition of the LIBOR. However, it can be critically
argued that this might not be an effective strategy since the RFRs fail to reflect the funding costs
of the bank (Schrimpf & Sushko, 2019). This is another major factor that distinguishes the
LIBOR rate from its replacement of RFRs. LIBOR used a cost plus pricing model which used to
cover the cost as well thus helping banks in compensating. However, with the abolishment of

LIBOR, it might become impossible for banks and therefore, there are chances that they seek the
compensation for such increased costs by increasing the spread between the rates.
Additionally, the article above fails to address many other issues that become prominent with the
looming doom of the LIBOR rate in they year 2021. The manner in which the LIBOR is deeply
embedded will present enormous challenges for the market participants to completely abandon it
risks that is possessed by the transition form LIBOR to another rate is also a prominent factorb
(Bos, 2019). Although there is no mandatory abolishment of LIBOR post 2021 on the market
participants, yet if in use it would be in a highly regulated and controlled manner making the
trade inflexible. Therefore, the article has been critically evaluated in the light of discontinuance
of the LIBOR rate from 2021.
QUESTION 2
Major issue in the exposure draft
Financial Accounting Standards Board has developed an exposure statement by proposing an
update in the accounting standards codification. The exposure draft states that they intend to
incorporate various suggestions that would help in incrementing the improvement in the
Generally Accepted Accounting Principles (GAAP) (Sedki, Posada & Pruske, 2018). The
exposure tends to facilitate the codification and update where the technical corrections to be
made, clarifications, simplifications, structuring and other minor improvements that would
overall assist in improving the understanding and knowledge about the GAAP and improving the
overall accounting standards. There are different intended amendments that would strongly affect
the different topics, areas and paragraphs and will be provided in the Amendment section of the
FASB accounting standards codification with explanation and justification of each amendment
that is being made (EXPOSURE DOCUMENTS & PUBLIC COMMENT DOCUMENTS, 2019).
The major provisions and amendments that would be incorporated would assist in:
 Addressing and eliminating the stakeholders' perception that the change in concepts
statements would lead to change in the existing authoritative guidance that they have
developed.
 Codification would be more integrated and wholesome so that stakeholders would not
require referring to some other sources so that the required information can be easily
obtained from the codification standards.

 The amendments would also ensure that the risk of these changes triggering some
unintended change gets minimized and thus the changes that these amendments bring
would be in a controlled environment.
The three sections of the proposed amendments would lead to simplification of the codification,
lead to its improvement and also update the current codification so that the current trends can
match the standards that are being adopted (Anderson, U. L. and et.al., 2016). There are 7
questions that have been proposed by the board on the exposure on which they welcome
comments and answers form the different stakeholders so that it would assist them in critical
evaluation of the proposed amendments that the have made.
Interpretation of Comment letters.
There were four comment letters that were selected out of all the comment letters that were sent
to the FASB (ONLINE COMMENT LETTERS, 2019). The first comment letter published by
NYSSCPA describes the comments by them made on the questions raised by Board of FSBA
(NYSSCPA, 2019). The say that they are in agreement of the amendments marked in the
codification of the proposed update and further say that they did not think any of the amendment
would require transition provision (Karim, K. and et.al., 2019). Amendment related to topic 805
is approved by them stating that they it is already being complied with by the reporting entities
and the amendment that is related to the issue 37, 38 and 39 can also be implemented with
immediate effect. They concluded with the fact that there were none of the additional changes
that they proposed and there is no requirement of special consideration.
The second comment paper by Thomas Heaton Spitters CPA is in slight contradiction with
above. They agree with the amendments and do not assume any major modifications to be made,
yet in relation to the Topic 805, they do not think that the assumed liabilities would not have
changed (THOMAS_HEATON_SPITTERS, 2019). They agree with the amendments of Issue 37,
38 and 39, but they don't think that direct adjustment of the retained earning is mandatory as
recommended in issue 37. Lastly, there are no additional changes that they recommend, but they
state that the users of the financial statement must not at any time be negligent of the business
operations which is recommended under special consideration that they should take.
The third paper published by VSCPA states that they are in completed agreement with all the
proposed amendments and all the questions that have been raised, but in the last question of
special considerations (.VSCPA, 2019). they state that according to them all the changes and

amendments that have been suggested would require retrospective or modified retrospective
consideration where the larger entities would have to be more effective in adopting and
implementing the complex changes that have been specifically suggested.
The last comment paper by RSM US LLP oppose the amendment 805-20-25-2 that is made
regarding the definition of liabilities stating that this can lead in an unintended change. Another
amendment 946-720-25-2 has been opposed by them stating that this leads one to believe that
rather than expenses, benefits should be expensed (RSM US LLP, 2019). Amendments like issue
10, 37, 38 and 49 require transition since they involve substantive changes and in Issue 10, the
changes can lead to significant alternant in deferred revenue valuation. They think that the
amendments cannot be applied what immediate effect and certain amendments need a specific
transition period concluding that they do not suggest any special considerations to be made.
Critical Analysis using theories
Public Interest Theory states that the regulations would lead to the benefit of entire society rather
than the interest of certain fixed parties and government is assumed to be a neutral arbitrator but
it has been criticized that the markets cannot operate efficiently if they are not regulated and
government cannot act neutrally (Allen, Ramanna & Roychowdhury, 2018). The comment letters
clearly show that the amendments that have been proposed by FSBA are neutral and helps in the
simplification of the implementation of the GAAP.
Private interest theory states that groups with different economic interests can lead to conflicts
and unjust preference to the more powerful groups but the comment papers show that there is no
unjust preference and although there has been higher resistance from the RSM US LLP, yet it is
purely objective and does not present their specific preference or dominance to mould the
changes proposed.
Capture theory basically assists in taking charge of the regulation i.e. it is made advantageous
and simplified for the public after its application and although there has been criticism that it can
influence interest of one group over the other, it can be clearly stated that in respect of current
comment papers, the capture theory is best implemented (Conner, 2016). It assists in simplifying
he understanding of the GAAP and accounting standards on its implementation and is largely
unopposed by different corporate bodies.

CONCLUSION
The above reports helps in concluding that the issue of LIBOR's demolishment needs to be
addressed more specifically suggesting a firm path or policy and the change proposed in the
accounting standards was evaluated by studying different accounting papers concluding that the
comment papers are beneficial in evaluating critically.

REFERENCES
Books and journals
Allen, A. M., Ramanna, K., & Roychowdhury, S. (2018). Auditor lobbying on accounting
standards. Journal of Law, Finance & Accounting, Forthcoming.
Anderson, U. L. and et.al. (2016). Comments by the Auditing Standards Committee of the
Auditing Section of the American Accounting Association on FASB Exposure Draft of
Proposed Accounting Standard Update: Notes to Financial Statements (Topic 235):
Assessing Whether Disclosures Are Material: Participating Committee Members. Current
Issues in Auditing. 10(2). C1-C9.
Bos, K. E. (2019). The LIBOR rate transition: On the implementation of transition approaches
from Interbank Offered Rates to Risk-Free Rates and the corresponding value
impact (Master's thesis, University of Twente).
Conner, B. (2016). FASB exposure draft highlights flexibility in financial statement
presentation. Healthcare Financial Management. 70(3). 34-38.
Crabb, J. (2018). In-house counsel: start Libor transition sooner rather than later. International
Financial Law Review.
Karim, K. and et.al. (2019). Using Linguistics to Mine Unstructured Data from FASB Exposure
Drafts. Journal of Information Systems.
Schrimpf, A., & Sushko, V. (2019). Beyond LIBOR: a primer on the new benchmark rates. BIS
Quarterly Review March.
Sedki, S. S., Posada, G. A., & Pruske, K. A. (2018). Differences Between US GAAP and IFRS
in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the Internal
Revenue Code. Journal of Accounting and Finance. 18(4).
Siboulet, F. and et.al. (2019). LIBOR Inside Out: Transition and Challenges. Wilmott.
2019(100). 12-29.
Williams, J. C. (2019). John C Williams: LIBOR-the clock is ticking.
Zhu, H. (2019). The Clock Is Ticking: A Multi-Maturity Clock Auction Design for LIBOR
Transition. Presentation at Planning for the end of LIBOR, Cass Business School.
Available online: https://www. cass. city. ac.
uk/__data/assets/pdf_file/0004/471757/15h_Haoxiang-Zhu_LIBORCass. pdf (accessed on
11 August 2019).
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Online
LIBOR Transition: What Now for Corporate Borrowers?. 2019. [Online]. Available through:
<https://globalcompliancenews.com/libor-transition-what-now-corporate-borrowers-
20191017/>
EXPOSURE DOCUMENTS & PUBLIC COMMENT DOCUMENTS. 2019. [Online]. Available
through: <https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176157086783>
ONLINE COMMENT LETTERS. 2019. [Online]. Available through:
<https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=12182201
37090&project_id=2019-800>
NYSSCPA. 2019. [Online]. Available through: <https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836089839&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=947983&blobheadervalue1=filename
%3DTC6.ED.002.NYSSCPA_ITA_M._RAHILLY.pdf&blobcol=urldata&blobtable=Mun
goBlobs>
VSCPA. 2019. [Online]. Available through: <https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090323&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=1281154&blobheadervalue1=filename
%3DTC6.ED.005.VSCPA_BO_GARNER.pdf&blobcol=urldata&blobtable=MungoBlobs
>
RSM US LLP. 2019. [Online]. Available through: <https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090294&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=779012&blobheadervalue1=filename
%3DTC6.ED.007.RSM_US_LLP.pdf&blobcol=urldata&blobtable=MungoBlobs>
THOMAS_HEATON_SPITTERS. 2019. [Online]. Available through:
<https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090385&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=723496&blobheadervalue1=filename
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%3DTC6.ED.009.THOMAS_HEATON_SPITTERS.pdf&blobcol=urldata&blobtable=Mu
ngoBlobs>
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BIBLIOGRAPHY
Article: https://globalcompliancenews.com/libor-transition-what-now-corporate-borrowers-
20191017/
Exposure: https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176157086783
Comments:
https://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&
project_id=2019-800
Comment article 1: NYSSCPA. 2019. [Online]. Available through:
<https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836089839&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=947983&blobheadervalue1=filename
%3DTC6.ED.002.NYSSCPA_ITA_M._RAHILLY.pdf&blobcol=urldata&blobtable=MungoBlo
bs>
Comment article 2: THOMAS_HEATON_SPITTERS. 2019. [Online]. Available through:
<https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090385&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=723496&blobheadervalue1=filename
%3DTC6.ED.009.THOMAS_HEATON_SPITTERS.pdf&blobcol=urldata&blobtable=MungoBl
obs>
Comment article 3: VSCPA. 2019. [Online]. Available through:
<https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090323&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
Disposition&blobheadervalue2=1281154&blobheadervalue1=filename
%3DTC6.ED.005.VSCPA_BO_GARNER.pdf&blobcol=urldata&blobtable=MungoBlobs>
Comment article 4: RSM US LLP. 2019. [Online]. Available through:
<https://www.fasb.org/cs/BlobServer?
blobkey=id&blobnocache=true&blobwhere=1175836090294&blobheader=application
%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-
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Disposition&blobheadervalue2=779012&blobheadervalue1=filename
%3DTC6.ED.007.RSM_US_LLP.pdf&blobcol=urldata&blobtable=MungoBlobs>
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