LIBOR $370 trillion headache gets accounting watchdog relief

This article was written by Silla Brush. It appeared first on the Bloomberg Terminal.

The demise of LIBOR and other scandal-plagued benchmarks may get a bit easier to handle after international accounting standard-setters said they’d give a helping hand to firms during the transition to new reference rates for $370 trillion in contracts.

Companies from banks to major oil traders would continue being able to account for derivatives in their financial statements during the transition as they do currently, according to a proposal published last Friday by the International Accounting Standards Board. Without that ability, firms face a major headache in how they report results, and might need to abandon so-called hedge-accounting practices used to limit volatility in profit and loss statements.

To use hedge-accounting practices, firms must be able to say that a transaction or cash flow tied to LIBOR is “highly probable” to occur in the future. With LIBOR set for discontinuation, that would be a hard call to make. The IASB proposal removes that question mark.

“There is a lot of uncertainty in the market,” Sue Lloyd, vice chair of the IASB, said in an interview. “It takes away one problem that people on a practical level are having.”

With regulators seeking to phase out the London interbank offered rate in 2021, the financial industry is ramping up efforts to accomplish the transition on time — with firms beginning to use the new reference rates for bond and derivatives contracts. LIBOR and the existing benchmark rates are still dominant, however.

About $370 trillion in financial contracts is tied to LIBOR or other interbank offered rates around the world, according to the International Swaps and Derivatives Association.

The proposal is open to public comment until June 17, and the IASB is planning to publish the final policy later this year.