Vol. 4 No. 2 (2024): Journal of AI-Assisted Scientific Discovery
Articles

The End of LIBOR: Transitioning to Alternative Reference Rates and Its Impact on Financial Statements

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  • Piyushkumar Patel,
  • Hetal Patel,
  • Disha Patel
Piyushkumar Patel
Accounting Consultant at Steelbro International Co., Inc, USA
Hetal Patel
Manager- finance department at Jamaica hospital, USA
Disha Patel
CPA Tax Manager at Deloitte, USA
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Published 27-10-2024

Keywords

  • LIBOR,
  • Financial Statements
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This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

How to Cite

[1]
Piyushkumar Patel, Hetal Patel, and Disha Patel, “The End of LIBOR: Transitioning to Alternative Reference Rates and Its Impact on Financial Statements ”, Journal of AI-Assisted Scientific Discovery, vol. 4, no. 2, pp. 278–300, Oct. 2024, Accessed: Jan. 01, 2025. [Online]. Available: https://scienceacadpress.com/index.php/jaasd/article/view/262

Abstract

The London Interbank Offered Rate (LIBOR) has long been a crucial benchmark for financial markets worldwide, serving as the reference rate for various financial products, including loans, derivatives, and securities. However, LIBOR has come under intense scrutiny in recent years due to concerns about its reliability and the potential for manipulation, prompting regulatory bodies to begin phasing it out. This transition to alternative reference rates (ARRs) marks a fundamental shift in the financial landscape, as ARRs, such as the Secured Overnight Financing Rate (SOFR) in the U.S. and the Sterling Overnight Index Average (SONIA) in the U.K., replace LIBOR across financial markets. The move to ARRs is not just a technical change but involves a profound rethinking of how financial products are valued, how risk is managed, and how financial institutions operate. As ARRs typically differ from LIBOR in calculation methodology, their implementation challenges financial professionals who must update their valuation models, risk assessments, & accounting practices. This shift can create complexities in financial reporting, particularly for entities with significant exposure to instruments linked to LIBOR. The cessation of LIBOR requires companies to carefully assess their contracts, renegotiate terms, & ensure that their financial statements reflect these changes accurately. The potential for misalignment in risk management strategies and accounting treatment is significant, requiring companies to stay vigilant in adapting their practices to the new environment. Despite these challenges, the transition to ARRs also presents opportunities for improved transparency and stability in financial markets. Companies and financial professionals must work closely with legal, accounting, and risk management teams to ensure that their operations remain in compliance with new regulations & that their financial reporting accurately reflects the impact of this shift. In navigating the end of LIBOR, companies must proactively understand the nuances of ARRs, ensuring they continue to meet the evolving demands of investors, regulators, and stakeholders while maintaining the accuracy and reliability of their financial statements.

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