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Reforming IBOR: the financial reporting impact

Helen Shaw explains the implications of the demise of inter-bank offered rates.

Interest rate benchmarks, such as the London Inter-Bank Offered Rate (LIBOR), playReforming IBOR a key role in financial markets, underpinning trillions of lending and derivative transactions. However, work is underway in multiple jurisdictions to transition to Alternate Reference Rates (ARRs), with LIBOR expected to be discontinued in the UK after 2021. The transition from LIBOR to an ARR will give rise to wide ranging practical challenges and could affect financial reporting.

The financial reporting implications are similar for both IFRS and UK GAAP reporters, with some likely to start taking effect before LIBOR is replaced. These pre-replacement issues relate to hedge accounting. In the absence of any relief in the accounting standards, the uncertainty arising from benchmark interest rate reform could result in hedge accounting needing to be discontinued. Widespread reclassification of amounts in cash flow hedge reserves to profit or loss and the cessation of fair value hedge accounting of fixed rate debt might then follow.