Start addressing the upcoming LIBOR phase-out now. Follow these six steps to assess your company’s risks and develop an action plan.
Banks aren’t the only entities that need to prepare for the phase-out of the London Interbank Offered Rate (LIBOR). Commercial organizations also need to transition away from this soon-to-be obsolete reference rate embedded in many loans and contracts.
Why LIBOR planning is imperative in 2021
LIBOR is a benchmark for short-term interest rates that underpins an estimated $223 trillion in financial transactions.1 But its use as a reference rate for new transactions will officially end after Dec. 31, 2021. In response, banks, borrowers, and other stakeholders need to understand what alternative rates are available and begin to modify existing contracts that reference LIBOR.
Detailed planning will be required for the LIBOR phase-out. Failure to prepare could expose organizations to numerous risks. For example, existing debt arrangements could convert from LIBOR to a higher or undesirable reference rate. Amendments to LIBOR-based contracts also could have an impact on earnings that might need to be reflected in financial reporting.
Finance and accounting leaders can follow these six steps to prepare for and minimize the risks their companies might face in light of the LIBOR phase-out.