March 21, 2019
The demise of the world’s most widely used—but scandal-tinged—interest rate will have significant accounting and financial reporting ramifications beyond its expected market shakeup.
The world’s most widely used benchmark interest rate set to expire at the end of 2021
- Accounting questions emerge about debt modifications, hedging
The London InterBank Offered Rate is tied to hundreds of trillions of dollars’ worth of debt, loans, and derivatives. Its expiration at the end of 2021, with no clear replacement benchmark on the horizon, is causing headaches for financial professionals and accountants worldwide as they try to figure out how to restructure debt and hedging contracts.
“This is really so pervasive, it’s going to affect literally every company out there,” said Ernie de Lachica, senior director at BDO USA LLP. Any business that has a loan likely has an interest rate tied to LIBOR, and banks making loans are going to have to figure out how to adjust the contracts once the rate goes away.
LIBOR’s ubiquity has confronted accountants with questions that need answers. Whatever rate will prove stable and reliable enough—and without threat of manipulation—to ultimately succeed LIBOR remains a work in progress. Regulators in several jurisdictions are pushing new benchmark interest rates tied to repurchase agreements but so far they haven’t gained the market acceptance of LIBOR.
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