I have floating rate financial liability and plotting its amortisation schedule. While drafting future cash flows, do I need to incorporate impact of future changes in indexation, for e.g. LIBOR, or plot the schedule on today's LIBOR for whole period of the liability? And incorporate changes of actual LIBOR at next payment date by taking its impact on effective interest rate without changing carrying amount of liability.
Amortisation Schedule
- Thread starter Dosani
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Steve-LevelUp
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The carrying amount of the liability would always remain the unpaid portion, regardless of changes in the LIBOR rate. However, the rate change would have a direct impact on your interest expense. So, you wouldn't be able to map the exact expense due to the changing rates, nor can the rates themselves be predicted. So, you do not need to incorporate these future changes as they are a complete unknown. If you are forecasting future cash flows, then it is simply a judgement call. You can forecast a LIBOR rate increase/decrease based on your own expert knowledge, however, giving it is just a forecast, it will not have an impact on your accounting entries.