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Preparing for IBOR retirement with intelligent contract analytics

Preparing for IBOR retirement with intelligent contract analytics

By Lynn Sumlin, Director in the Financial Services division at Seal Software

As we begin to phase out Interbank Offered Rates (IBOR Benchmark Rates), including the London Interbank Offered Rate (LIBOR), the financial services industry faces a significant contractual shift. While there are numerous IBOR Benchmark Rates, LIBOR has been most commonly used interest rate benchmark in a wide variety of transactions, including credit agreements, bonds, and qualified financial contracts. As the reference rate for more than $100 trillion of financial products, LIBOR’s prevalence makes it a nearly universal contractual component. IBOR Benchmark Rates, including LIBOR, are being phased out by 2021 in favor of Alternative Reference Rates.Preparing for IBOR retirement with intelligent contract analytics 1

Unfortunately, the shift to the new rates is not a matter of simple substitution. The proposed Alternative Reference Rates vary from their IBOR predecessors in a variety of characteristics, including the existence of a robust market, tenor options, whether secured or unsecured and resulting accounting implications.

The IBOR phaseout is estimated to impact over $350 trillion worth of contracts. In order to effectively manage the transition, companies and financial institutions alike must review every aspect of their business that depends on any of the IBOR Benchmark Rates. Risk management and remediation are often time-consuming and costly, posing key challenges during the review process, however those processes will be crucial in the transition away from IBOR Benchmark Rates.

Contractual documents in the IBOR equation

Identification of transactions that are subject to the IBOR Benchmark Rates is the critical initial step. Companies and financial institutions must identify all legal documents with an IBOR Benchmark Rate implication in order to manage their transition. Importantly, some contracts may not include a specific IBOR Benchmark Rate reference but are related to an underlying IBOR Benchmark rate related contract. These contracts are important in the review because they often contain critical rate adjustment provisions. Financial institutions need to understand their contract landscape, in order to begin segregating contracts based upon factors such as expiration or tenor, identification of the form of IBOR Benchmark Rate, as well as potential rate adjustment or fallback options. The goal will be to segregate or triage existing contracts for risk prioritization review. Triaging the contracts into like groups will serve to streamline the remediation workflow.

A well-defined and cross-functional transition program is vital to remediation at this scale. Organizations must establish a governance structure across impacted business lines, allocate a budget, and identify clear workstreams for effective transition. Consequently, the success of an IBOR remediation workflow plan depends on an ability to clearly identify and understand the nature and scope of the impacted contract landscape, and the ability to efficiently take the steps needed to transition away from IBOR Benchmark rates. Organizations will be able to minimize risks and challenges through an established and clearly defined remediation program that allows for early engagement of contracting parties, regulators and industry associations.

As an example of the benefits of early review and triage, the identification and segregation of template contracts allows for an expedited and defined workflow to be put into practice. Template contracts, with and without modification, can be assessed now and pushed into defined remediation workflow process that can be implemented immediately. Expeditious segregation of those template-based contracts affords more time for dedicated review of contracts that require a unique remediation approach.

Each institution appears to have a unique approach to its remediation workflow.  Some triage bucketing examples may include contracts expiring prior to 2021, meaning they will naturally go through remediation process prior to IBOR retirement. Additionally, contracts that identify a specific non-IBOR replacement benchmark, such as SOFR, SONIA or other Alternative Reference Rate, as well as those with a substitute rate determined by the administrative agent and borrower, must be evaluated. In some cases, contracts will specify conversion to a fixed rate, or they will be silent on determination of a replacement rate, and these also must be segregated.

Further, patterns may arise that will allow for a defined remediation workflow to develop.  In order to have a successful remediation solution, institutions need a thoughtful remediation structure but will also need to be flexible to adjust as new patterns emerge and more clarity surfaces regarding use of Alternative Reference Rates.

Contract analytics in a well-managed transition

Contract analytics solutions, particularly those that employ advanced Artificial Intelligence (AI), accelerate contract review and remediation efforts of critical financial transactions. By identifying legal documents based on the presence of IBOR-related terms, these platforms can deliver insight and automation to streamline the IBOR review process. Best-of-breed solutions can identify and extract key IBOR-related topics from a wide range of financial transactions, including commercial credit agreements, derivatives and trading instruments, mortgages and bonds. They make it possible to recognize variance in standard contracting language, a capability that not only expedites the triage process, but also feeds directly into automated decision-making regarding replacement documents.

Moreover, AI can deliver additional critical insight with respect to the contents of financial contracts. For example, AI-driven contract analysis is adept at identifying contractual clauses and terms relating to the waterfall of rate adjustment provisions. AI can also be trained, in support of remediation decision-making processes in critical financial transactions, to find and extract organization-specific risk management terms.

By way of example, discerning whether an agreement contemplates an IBOR successor rate will allow management to quickly determine whether existing rate adjustment provisions provide sufficient guidance on replacement rates, or whether the contract must undergo an amendment or full repapering process. Another example of organization-specific terms relates to when that institution (or any of its related entities) serves as the Administrative Agent or Calculation Agent. This insight can provide further risk prioritization bucketing assistance as the institution is on notice that it has higher duties and obligations in those transactions.

The most effective AI tool for IBOR remediation will not only have a deep understanding of the key issues of concern and contract analytics in place for the IBOR remediation analysis, the most effective AI tool for IBOR remediation also will be flexible to incorporate new guidance, such as the ARRC or ISDA fallback language provisions as those provisions begin to be incorporated into relevant agreements. Additionally, the ability to create institution-specific contract analytics will significantly enhance the ability to efficiently review and triage contracts. An important goal of such a massive remediation effort is to tackle the steps to remediation in an efficient and clear manner.

Risk and opportunity on the horizon

While the phaseout of IBOR Benchmark Rates is clearly on the horizon, there is still much uncertainty about the use and effectiveness of the proposed Alternative Reference Rates. Even though the future of the rates and the related cost implications may remain unknown for some time, institutions are well advised to heed regulatory warnings to begin the contract landscape review now.

Beyond the contract landscape review, there are other widespread implications that each institution must assess, including customer outreach, information systems and strategies. Those assessments also will require heavy resources and time, thus another reason to make contract landscape exposure review as efficient and expeditious as possible through the use of AI contract analytics.

It is arguably mission-critical to build actionable insight from the data made available in the IBOR phaseout to minimize risk and maximize revenue. A smooth process, and one that avoids litigation or costly administrative burdens, will provide insight into contracts and lend certainty to the shift that lies ahead. Further, the work done today will better position the institution for the next regulatory shift. After years working in regulated industries, we can be certain that there is always another shift on the horizon.


Lynn Sumlin is a Director in the Financial Services division at Seal Software. With knowledge gained from more than 25+ years in the practice of law and the use of legal technologies, Sumlin has served in leadership roles as both an attorney and an expert in the use of advanced analytics for contract management and remediation. She is a graduate of the Fredric G. Levin College of Law at the University of Florida and Vanderbilt University.


From accountants to advisors: changing roles and expectations

From accountants to advisors: changing roles and expectations 2

By Chris Downing, Director for Accountants & Bookkeepers at Sage

The line between strategic advisor and traditional accountant is blurring. Over the last year, 82% of accountants said their clients were demanding a wider service offering, including business and technology implementation advice. In the current climate this transition has only been accelerated.

Clients increasingly expect their accountants to take a more active role in change management and predicting their cashflow months into an uncertain future. This is enabling businesses to tackle the challenges of day-to-day operations, while keeping an eye on what the post-COVID world will look like, and the support they will need to return to strength.

To solve these new and complex, expectations accountants must develop a different way of working. They will be required to increasingly supplement the traditional, compliance and reporting aspects of their work with business advice and consultancy. To do this, accountants need the ability to move quickly and efficiently, with a firm grounding in technology and data control.

Get straight to the point

The priorities of yesterday are very different to the goals of today. Where businesses once focused on driving growth and efficiency, the objective for many now is continuity – understanding what government support is available and for how long. In the current climate, speed of delivery and client care are top of the agenda.

But the way accountants go about this is very important. Rules are changing every day – the definition of an ‘essential business’, government support and bank loan programmes are constantly in flux. In normal times, an accountant’s role is to ensure their clients are aware of and reactant to these changes. Yet, how much value does this create for them in the ‘now’?

To be valuable, new information must be delivered quickly but it should also be succinct. It isn’t useful for clients to be bombarded with email updates, or reports running into hundreds of pages, trying to explain the week’s changes. With so much present noise, it’s the accountant’s task to break through the information overload and provide the client with crucial resource only.

To understand client pain points and get to the heart of what they really need, a running dialogue is essential. Building individual client relationships will unlock the potential to deliver tailored experiences that meet their business demands. Armed with this insight, accountants can then distil complex information into digestible chunks.

A more entrepreneurial spirit 

Sharing insight is only the start.  The other half of the story relies on consultancy. In the Covid-19 environment, the routine aspects of an accountant’s work are being supplemented with the transformative changes they can make for clients. Cashflow projections for the next six months are crucial, but even more so is the advice an accountant can offer on improving the financial outlook of a business.

Chris Downing

Chris Downing

To provide this balance, accountants should embrace a more entrepreneurial way of thinking. Not only advising on how clients can meet current challenges, but also how they can innovate to drive new revenue streams in the future. Part of this means being willing to step outside of their comfort zone. Many firms are already investing in the skills and technologies they need to service novel demands – like advising on relevant accounting and finance technologies.

While many businesses remain closed to the public, even as lockdown eases, they have increased capacity and flexibility to shift operations towards what will be most effective and profitable. Clients will be open to changing their business focus to meet demand spikes in other areas as they do not have to account for a disruption to customer service. For example, many distillers shifted production from beverages to hand sanitiser while bars and restaurants were closed.

With their contextual understanding of client finances, accountants are uniquely placed to advise their clients on change and guide them through the transformation process. Though this requires a more innovative model of accounting, and one that is willing to embrace the latest technologies.

Truth in the cloud

Business advice needs to be backed by data, especially for accountants engaging directly with the CFO. Scenarios need to be modelled, analysed, tracked and compared over time to arrive at the most effective proposal for the client. This is outside the wheelhouse of traditional accounting, but it’s becoming necessary in an industry heavily disrupted by new technologies.

To keep up with the ever-growing need for rapidly available data and analytics capabilities, more and more accountants are turning to the cloud to consolidate and use their data estate, while automating the time-consuming tasks of data management. Indeed, the majority (91%) of accountants have said new technology has delivered fresh value to their business in the last year, whether it increases productivity or frees up more time to focus on client needs.

Against the backdrop of coronavirus and technological disruption, a new breed of accountant is quickly emerging. Innovation is possible for those who stay ahead of client expectations and are aware of their needs, embrace an entrepreneurial mindset and adopt the latest cloud and automation technologies. In this way, an accountant becomes an integral part of their client’s business.

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Preparing for the new normal and building a financial plan

Preparing for the new normal and building a financial plan 3

By Donna Torres, director of small business at Xero UK

There is some light at the end of the tunnel for small businesses. As the lockdown continues to ease many retailers and hospitality businesses are now opening up again, or preparing to return soon.

Preparing for what’s around the corner has always been key to business success. Whilst there is still much uncertainty, it’s more important than ever that businesses get in control of their finances and create a solid plan.

Having a strong understanding of your cash flow and a plan for the months to come is vital to helping you prepare for what’s ahead. If you’re unsure where to begin, here are five ways to start:

Take stock

Financial experts Lauren Harvey (Founding Director of Full Stop Accounts) and Jonathan Graunt (Founder of accountancy firm FD Works and Xavier Analytics) recently spoke with Xero about the uplift in businesses taking an interest in their finances and understanding their financial position.

Businesses should be using this time to review their processes and really understand their numbers. It can be helpful to reflect on your original statement – what do you really want your business to do? And has the pandemic changed this? Use this as the fuel to drive your business vision forward.

Consider the risks

The government has provided SMEs with a number of support schemes, but the conditions and capital being offered is changing.

For example, the Furlough Scheme will currently only run until the end of October and the deadline to furlough new employees has now passed. The government will also gradually be reducing the amount it pays under this scheme. Make sure you’ve accountanted for this in your financial plan so you have a clear picture of how furlough tapering off will impact your business and any adjustments you might need to make.

If you’ve taken out one of the Government backed loans, now is the time to start building repayments into your financial plan. Building a solid plan will also help to ensure that you use the money in the best way to support your business in the long-term. It can be tempting to fight the most immediate fires with your capital, but try to think about the longer term health of your business – and where the money is going to have the most impact.

Adapting to a change in demand

Covid-19 has forced businesses to adapt to a lot of changes and SMEs should be thinking carefully about how their customer demand has changed. What do customers expect from you now? For example, many are still apprehensive of shopping on the high street. This might mean some of the options you offered during lockdown like deliveries or online services should remain.

Communicate with your customers as much as possible to get an accurate view of what they need from you now and in the future. How can you fulfil this? Then it’s important to look at the numbers and scrutinise which areas are going to provide the most return on investment.

Financial Planning: where to start?

For financial planning to be effective, it’s helpful to get into habits that will provide an accurate snapshot of how your business is performing. Reconciling bank transactions daily, creating a daily simple cash flow check-in habit and examining your profit and loss statements weekly will give you a better understanding of where your business stands.

Apps like Float or Fluidly will help to give you an accurate look at your cash flow in an easy to read visual. And the recently launched Xero Short-term Cash Flow tool can help you project your bank balance 30 days into the future, showing you the impact of existing bills and invoices if they’re paid on time. You can then work out which invoices you should follow up on.

Some people can find this task daunting, but your accounts aren’t just being kept for reporting to HMRC, they are also there to give you invaluable insight into your business and to plan for the future.

Ask for help

Your accountant is there to help you to understand your finances. This is likely to be one of the biggest economic challenges you have ever faced as a small business owner. Now, more than ever, it is time to lean on your accountant to help create a robust plan.

If you do not understand something, or need guidance or clarification, get in touch and ask for their expertise and advice. If their advice doesn’t help, ask them to explain it again.

You can also check out Xero’s online guide to managing cash flow here.

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The impact and implications of Covid-19 on financial reporting

The impact and implications of Covid-19 on financial reporting 4

By Mark Billington, Regional Director, Greater China & South-East Asia, ICAEW

The economic consequences of Covid-19 have been unprecedented, affecting activity in nearly every country in the world. Indeed, the latest forecast from the Institute of Chartered Accountants in England and Wales (ICAEW) projects that most economies in South-East Asia (SEA) would fall into recession in the first half of 2020 and Gross Domestic Product will contract by 1.9 percent over the whole year[1]. Across the region, governments have had to bring in various fiscal stimulus measures to protect the economy.

Exceptional times bring tremendous challenges for businesses and requires leaders to have a clear view on the short- and long-term effects of Covid-19 on their businesses, and to respond accordingly. This starts with taking extra care to recognise the impact of Covid-19 in financial reports, especially of events which have occurred between the balance sheet date and the date when the accounts are authorised for issue.

Distinguishing between adjusting or non-adjusting events

As the coronavirus outbreak continues to evolve and more information comes to light about the nature of the virus and its impact, companies with 2020 year-ends need to consider how it has affected their business and how the effects should be reflected in the accounts at the end of their reporting period. This boils down to distinguishing whether Covid-19 should be accounted as an adjusting or non-adjusting event.

In December last year, China alerted the World Health Organisation (WHO) to several cases of an unusual form of pneumonia in Wuhan, central China’s Hubei Province. But it was only early this year when substantive information on what has now been identified as coronavirus (Covid19) came to light. As a result, for companies with a 31 December 2019 year-end, Covid-19 is generally considered to be a non-adjusting event.

This changes for companies which have early 2020 year-ends, who will need to consider the timelines more carefully to assess the conditions at the end of their relevant reporting period. For companies with 31 March 2020 year-ends, Covid-19 is likely to be considered a current-period event, which means that companies need to assess and record all events and conditions that existed at or before the reporting date. When it is determined to be an adjusting event, a business will need to review all areas of the accounts that might be adversely affected by the COVID-19 virus.

There may be a greater degree of judgement required when identifying the conditions at the end of the reporting period, and a closer assessment needed of whether developments are adjusting or non-adjusting.

Exercising judgement about conditions at the balance sheet date

Companies have to exercise significant judgement to determine the conditions that existed at the balance sheet date. This is heavily dependent on the reporting year end in question, the company’s own individual circumstances and the events which are under consideration.

A number of factors should be considered when making judgements about conditions at the balance sheet date. This includes the timing and impact on stakeholders such as staff, customers, and suppliers, of travel restrictions, quarantines and lockdowns, closure of businesses and schools; and government support initiatives. With each of these events, companies have to determine whether an event shines a brighter light on conditions at the balance sheet date or if conditions changed after the reporting date.

Mark Billington

Mark Billington

This evaluation in financial reporting is important because it affects the forecasting of future income and cash flows, which are based on conditions that existed at the balance sheet date. Estimating recoverable amounts might be very different for the same asset if the calculation was performed for a 2019- or 2020-year end.

Upholding values of corporate transparency and trust

In these times of uncertainty and crisis, it is even more important to be transparent about risks and assumptions used in financial reports, and to make disclosures as specific to the business as possible, to avoid the risk of financial reporting being downplayed. In fact, market regulator Singapore Exchange (SGX) and rating agency Fitch Ratings have recently cautioned companies against using alternative performance measures such as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports to flatter results, and stressed that “disclosures must be balanced and fair and avoid omission of important unfavourable facts”[2].

More than ever, businesses must continue to diligently uphold values of corporate transparency and trust and continue to disclose transparent and quality information to investors and other stakeholders. In order to do this, directors are tasked with the important responsibility to comply with various reporting standards and understand the circumstances of particular disclosures to provide a fair and balanced assessment of the company’s financial position and performance.

Covid-19 also has significant implications for audit reports on company financial statements. Preparing and auditing financial statements poses tough calls in difficult and unclear circumstances for directors and auditors. It is vital that these uncertainties are interpreted appropriately and in the context of the current unprecedented circumstances

As the business impact of COVID-19 continues to unfold and affect economies and the future of many organisations, businesses should continue to consider both their situation but also the wider economic landscape they operate in and reflect that in their financial reports.

[1] ICAEW, “Coronavirus Global Outlook: after the outbreak”, May 2020

[2] SGX warns against use of ‘earnings before coronavirus’ metric, The Business Times, 27 July 2020

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