Money & Banking

Life after LIBOR: MCA shows the way on corporate financial reporting

K. R. Srivats New Delhi | Updated on June 20, 2021

LIBOR was a favourite benchmark and an estimate of the rate at which big banks in London lent to each other   -  IStock Photo

Amends several Indian accounting standards for this purpose

Corporate India and the financial sector, including banks, now have guidance on financial reporting of the transactions undertaken with new interest rate benchmarks that are to replace the London Interbank Offered Rate (LIBOR) at the end of this year. The Ministry of Corporate Affairs (MCA) has effected amendments to several accounting standards to cover the International Accounting Standards Board's Phase 2 amendments, Interest Rate Benchmark Reform finalised in August last year.

These changes to existing Indian accounting standards are expected to smoothen financial reporting under the replacements for LIBOR.

LIBOR was a favourite benchmark and an estimate of the rate at which big banks in London lent to each other. Every day, bankers got borrowing costs for each of the LIBOR's five currencies — US dollar, British pound sterling, Japanese yen, Swiss franc and the euro — for periods ranging from overnight to a year.

SeveralA diversity of candidates recommended by the central banks of the US, Japan, Switzerland, UK and the EU are going to replace LIBOR as the benchmark rates, said experts in the financial sector. A major issue in the transition is that LIBOR is based on an average of bank lending rate. However, the replacement rates are based on the actual overnight money market transactions.

Replacement rates

Central banks around the world have established their own replacement rates. In the case of the dollar, it is the secured overnight financing (SOFR), while it is the sterling overnight index average (SONIA) for the pound; the Tokyo overnight average rate (TONAR) for the yen; the Swiss average rate overnight (SARON) for the Swiss franc and the Euro short term rate (ESTR) for the euro.

Sandip Khetan, Partner and National Leader, Financial Accounting Advisory Services (FAAS) at EY India said: “MCA has issued Interest rate Benchmark Reform - Phase 2 Amendments and has consequently made amendments to IND AS 109, IND AS 107, IND AS 104 and IND AS 116 (Indian accounting standards). We recommend that entities complete their assessment of the accounting implications of the scenarios they expect to encounter as they transition from LIBORs to RFRs and accelerate their programmes to implement the new requirements. Where the Phase 2 amendments introduce new areas of judgment, entities need to ensure they have appropriate accounting policies and governance in place.”

Prateek Aggarwal,Partner, Nangia & Co LLP said the amendments made by MCA to various Indian Accounting Standards pertains to the the changes required in the relevant standards post Phase 2 of Interest Rate Benchmark Reforms and also due to the issuance of Conceptual Framework for Financial Reporting under Indian Accounting Standards.they believe the changes made by MCA are in line with the earlier recommendations by ICAI.

“Some of these Guidance/disclosures will enable users of financial statements to understand the effect of these changes, e.g. interest rate benchmark reform changes require an entity to disclose information about the nature and extent of risks to which the entity is exposed arising from financial instruments subject to interest rate benchmark reform and how the entity manages these risks and the entity‘s progress in completing the transition to alternative benchmark rates,” he said.

Published on June 20, 2021

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