Preparing for the impact of the LIBOR transition
Preparing for the impact of the LIBOR transition
Insight

Preparing for the impact of the LIBOR transition

With LIBOR going away, find out how to get ready for what comes next.

The London Interbank Offered Rate (LIBOR) is expected to be phased out after 30 years, and the shift to an alternative baseline reference rate after 2021 could have a cascading effect beyond contract terms into the operations and financial reporting of thousands of institutions.

With an estimated $370 trillion of global contracts referenced to LIBOR, the impact of transition will be far reaching. Affected companies may see a rise in compliance, financial reporting, staffing and other costs. The shift from LIBOR could ultimately impact processes across the organization, in areas including:

  • Governance and oversight
  • Strategy
  • Scope/impact inventory
  • Contract change management
  • Modeling remediation
  • Operations and technology remediation
  • Client and regulatory communications
  • Accounting, tax and internal audit
  • Post-transaction activities

The change in the benchmark reference rate is also expected to trigger accounting related issues under both U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Accounting standards setters and market participants foresee wide-ranging accounting impacts, including effects on hedge accounting, debt modification, and discount rates for impairment testing, lease accounting and fair valuation. 

Understanding the extent to which the transition from LIBOR could affect an organization is critical. Organizations need to prepare now to manage the transition in the coming years or risk increasing costs and unforeseen resource needs.

A good place to begin is with an inventory of potential areas of accounting impact. One approach is to consider each model leveraging LIBOR and determine its dependencies throughout the organization, from finance and accounting, to business, legal, IT and operations. Such an assessment should be part of a larger strategy to address the potential effects of the LIBOR transition across the organization.

Are you ready for the phasing out of LIBOR? Find out how to get a head start here. Prepare to execute your next deal efficiently and disruption-free with KPMG’s Accounting Advisory Services.