On Friday, SEC staff published this Statement on LIBOR Transition encouraging companies and other market participants to be proactive in identifying, evaluating, and mitigating the risks - including but not limited to contract-related risks - associated with the anticipated discontinuation of LIBOR after 2021. Notably, in addition to suggesting questions that can be used to facilitate a contracts risk analysis, the Statement includes staff guidance from each of the Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of the Chief Accountant (OCA).
Corp Fin's guidance is logically focused on companies providing appropriate, MD&A-type disclosure on material LIBOR-related risks. Specifically, the guidance encourages companies to consider this guidance in determining what disclosures are relevant and appropriate:
- The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed.
- When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.
- Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company. This could include qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past 2021.
While - to date - LIBOR transition-related disclosure reportedly is most often provided by larger companies and companies in particular industries, Corp Fin expects many other companies to be impacted and suggests that all begin planning for the transition now to ensure they will have adequate time to address the impacts.
The OCA guidance suggests areas of accounting and financial reporting (and related disclosures) that may be impacted by the LIBOR phase-out, including modifications of terms within debt instruments; hedging activities; inputs used in valuation models; and potential income tax consequences.
See also the SEC's release; this Stinson post; this Reuters article; these past Society Alert reports: "FASB Signals Accounting Relief for LIBOR-Based Contracts," "LIBOR Transition: Here's How," "(More) Libor Phase-Out Risk Disclosures," "Libor Risk Disclosure Trending Up," and "LIBOR Phase-Out Risk Considerations," "Reminder: SEC Focused on Cyber, Brexit, LIBOR-Related Disclosure," and "SEC Looking for Better Brexit/Cyber/Libor-Related Risk Disclosure"; and additional information & resources on our Risk Management & Oversight page and under Practical Guidance/Resources on our Financial Reporting page.