LIBOR Update: Successors and Strategies for Non-Financial Entities



The clock is ticking down for the London Interbank Offered Rate (LIBOR) which is set to be retired at the end of the year. Even so, Fitch Ratings reports that U.S. structured finance sectors are still primarily using USD LIBOR to floating-rate bonds which could spell insufficient liquidity if the market fails to move to an alternative soon1. In other words, without transitioning to an alternative, markets could experience more volatility later in the year.

According to CFO Dive, the preferable successor recommended for use by the Fed is the Secured Overnight Financing Rate (SOFR) but aside from derivative markets where it is already the almost certain replacement for LIBOR, cash markets are less certain as five different reference rates are vying with overnight and term SOFR. One such substitute, Bloomberg Short Term Bank Yield Index (BSBY), was singled out by Securities and Exchange Commission Chair Gary Gensler as unsuitable due its potential for manipulation, the very reason LIBOR saw its winddown after 20122.

So, why are financial market participants still looking beyond SOFR? According to Lexology, these five alternative benchmark rates capture the cost of unsecured bank borrowing which is one trait of LIBOR that is not carried forward by SOFR. This is relevant because most banks fund themselves using this rate, rather than the secured overnight rate based on transactions in U.S. Treasury securities that SOFR uses3.

With all this uncertainty ahead of the Dec. 31 cutoff for LIBOR, how can CPAs provide guidance to their clients and firms? Because the change affects any borrower via rate-referenced debt or is under an agreement which references LIBOR, it will have wide-spanning impacts throughout all industries, the Journal of Accountancy reports. Last year, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) which addressed issues related to the transition.

While SOFR is the recommendation, it is not yet required if it ever becomes so. When considering how to assist clients facing the LIBOR challenge, CPAs will want to consider what is best for the situation at hand. For non-financial companies, CPAs can assist with taking inventory of contracts that contain reference rates and perform an impact assessment of the LIBOR discontinuation, according to the Journal of Accountancy.

The evaluation of contracts and mitigation of impacts for existing contracts could last through several reporting periods. Therefore, companies will want to consider disclosing the status of their transition to date and report significant issues in need of addressing. For now, areas of focus should include loan term adjustments, debt covenant changes, interest rate hedges, operation function impacts, internal control updates, IT updates and communication with stakeholders4.

For those that do decide to adopt SOFR, a checklist can be found here. The MICPA will continue to follow this issue closely as it develops. Log on to MICPA Connect to discuss strategies, concerns and questions related to the LIBOR transition and other emerging topics within the profession. 

  1. Structured Finance New Issuance Slow to Move Away from USD LIBOR.” Fitch Ratings. 01 Jul 2020. Accessed on 02 Jul 2021.
  2. Tyson, Jim. “Market Volatility May Rise on Absence…CFO Dive. 30 Jun 2021. Accessed on 02 Jul 2021.
  3. Brown, Mayer. “Eeny, Meeny, Miny, Muse…Lexology. 30 Jun 2021. Accessed on 02 Jul 2021.
  4. Mishler, Mark D. “End of LIBOR: How All Industries…Journal of Accountancy. 01 Aug 2020. Accessed on 02 Jul 2021. 

Source: MICPA

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