Is Your Organization Ready for the LIBOR Sunset?

Abstract

It is expected that InterBank Offered Rates (IBOR) will cease to exist at the end of 2021. IBORs are interest rates constructed by banks based on estimates of borrowing costs between banking institutions. Three examples include LIBOR (London), HIBOR (Hong Kong), and TIBOR (Tokyo). After 2021, banks will no longer be encouraged by bank regulators to make IBOR submissions, thus precipitating the demise of the IBOR. Unfortunately, hundreds of trillions of dollars of loans and derivative instruments are based on IBOR indexes. As a result, many firms will have to amend or replace current loan agreements and hedging documents to account for the change. In this article, the authors provide a brief history of LIBOR. Then the authors consider the accounting impact of IBOR’s sunset under current and proposed US accounting standards and international accounting standards. Most important, the authors recommend that firms address the issue in the near future, rather than waiting until the IBOR sunsets at the end of 2021. TOPICS:CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance, financial crises and financial market history Key Findings • IBOR sunset has the potential to create significant financial reporting issues. • The financial reporting issues related to LIBOR sunset could impact businesses in many different industries. • Companies should start preparing now for the upcoming IBOR transition.