Step 1: Identify exposure
Organizations should begin by determining their population of contracts with references to LIBOR. Finance leaders can set up a cross-functional team (for example, human resources, real estate, and legal) to catalog all affected contracts that could include:
- Variable-rate loans
- Interest rate swaps and other derivatives
- Corporate debt
- Leases
- Deferred compensation arrangements
- Intercompany arrangements
Organizations also should consider internal processes that use LIBOR, such as fair value estimates, internal forecasting, and budgeting.
Step 2: Assess preparedness
The cross-functional team should analyze each affected contract or process, flagging those contracts that have an undesirable resolution or a resolution that is not clearly defined. For example, does a contract have fallback language to address a potential LIBOR replacement rate, and is that language sufficiently clear? Or does the organization have a plan on how it will modify existing processes that use LIBOR?
Step 3: Develop a resolution plan
Next, the cross-functional team should develop a plan that identifies and addresses the company’s risks and exposures across operational, financial, tax, and reporting areas. As part of the planning process, the organization should consider its preferences for an alternative rate as well as biases or preferences of the counterparties to their contracts. For a detailed comparison of reference rates, watch the Crowe LIBOR webinar (beginning at 44:17).
In addition, planning efforts should consider key external dates for the LIBOR phase-out:
- Dec. 31, 2021: Cessation of U.S. dollar (USD) denominated LIBOR one-week and two-month rates, as well as all non-USD-denominated LIBOR rates
- June 30, 2023: Cessation of all remaining USD LIBOR settings (for example, three- and six-month LIBOR)
Step 4: Execute resolution plan
With a plan in place, business decision-makers (with accounting teams advising them) should begin discussions with contract counterparties such as lenders. Together, they can agree to amend contracts and either directly replace LIBOR or add appropriate fallback language.
Step 5: Address financial reporting
Accounting teams should determine if contractual amendments affect financial reporting and disclosures. For example, an amendment could change a contract’s cash flows, which might give rise to modification accounting and hedging issues.
Accounting teams also should also weigh the pros and cons of applying Accounting Standards Update (ASU) 2020-04, Reference Rate Reform (Topic 848), which provides temporary, optional guidance to simplify accounting and financial reporting for all contracts modified to replace LIBOR. For an in-depth discussion on Topic 848, watch the Crowe LIBOR webinar (beginning at 1:01:31).
Step 6: Communicate with stakeholders
Communication with key stakeholders is imperative. Both public and private companies should be transparent about material impacts stemming from the LIBOR phase-out, but they also will need to determine what level of disclosure is warranted for each audience.
Proactive communication and early planning can help financial and nonfinancial organizations alike navigate the LIBOR phase-out and avoid costly consequences.
