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The world's largest accounting body is considering changing the standards for dealing with Libor-linked transactions in their balance sheets by banks and corporations, in a rare leniency boost for a sector facing the reform of global benchmarks.
The International Accounting Standards Board will issue proposals Friday easing the treatment of former benchmarks type Libor and more recent, such as Sofr, the US indicator.
If adopted, the IASB's decision, which sets the accounting rules followed by 144 countries, would help banks, among other things, to avoid penalties, as they perform the tricky task of moving away. outrageous benchmarks.
Global regulators want the market to eliminate Libor and sell thousands of loans, mortgages and derivative contracts on the basis of overnight transaction-based rates, by the end of the year. 2021.
The Libor rate, which measures the cost of unsecured loans between banks for a given period, is largely based on bank estimates. This methodology has been problematic, but the rate remains embedded in contracts ranging from mortgage loans to banks' regulatory capital. More than $ 370 million worth of business is linked to it.
Moving to a new rate is a complex task. Transactions referring to new rates accounted for less than 3% of the theoretical derivatives market in the first quarter of this year, according to ISDA, an agency specializing in trading.
The relocation of the IASB would temporarily solve an accounting problem. At present, banks and companies can use a technique known as hedge accounting to minimize the impact on their balance sheets if a product, such as a loan, and its swap offsetting the risks cancel each other out. But a change in the terms of a derivative contract could mean that the swap is terminated, leaving both parties to leverage more capital to find new hedges.
The IASB said its existing standards required companies to use forward-looking information to apply hedge accounting – an enigma given that there is little consensus on when indices current benchmarks will be replaced, or even on the interest rate that would be used.
"This, in turn, could reduce the usefulness of the information contained in the financial statements for investors," said Hans Hoogervorst, chairman of the IASB.
Libor reform is further complicated because Libor and the new overnight rates do not always move together. The gap, or the difference between the two rates, can sometimes reach up to half a percentage point in times of volatility. Before the financial crisis, it was about a tenth of a percentage point, according to EY, the professional services firm.
The reliefs would be applied to IFS 9 and IAS 9, the IASB said. The IASB added that it would further badess the potential accounting implications of the benchmark reform as more information becomes available. The market has until mid-June to respond to proposals from the IASB, which hopes the final changes will be ready for early next year.
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