FASB Summary of July 27, 2004 Board Meeting Discussion

FASB: Summary of July 27, 2004 Board Meeting Discussion

Derivatives Implementation Group

Summary of July 27, 2004 Board Meeting Discussion on Statement 133 Implementation Issues

Financial instruments: derivatives implementation. The Board discussed respondents’ comments and the staff’s proposed revisions to Statement 133 Implementation Issue No. G25, “Using the First-Payments-Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans.” The Board did not object to the staff’s recommended revisions to permit the use of the first-payments-received technique in a cash flow hedge of the variable prime-rate-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of prepayable interest-bearing loans (without the limits discussed at the May 12 meeting), provided the hedging relationship meets all other conditions in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, for cash flow hedge accounting. Any ineffectiveness in the hedging relationship would be reported in earnings consistent with paragraph 30 of Statement 133.

The Board did not object to the following staff-recommended changes to Implementation Issue G25:

  1. Clarify that the guidance in Implementation Issue G25 is an exception and explain the nature of the exception.

  2. Modify Implementation Issue G25 to incorporate the routine language for Board-directed answers in Statement 133 Implementation Issues.

  3. Modify the guidance to also indicate that a comparable first-payments-made technique related to financial liabilities may be used.

  4. Modify Implementation Issue G25 to emphasize that the hedged interest payments in a basis swap hedge under paragraph 28(d) must relate only to financial assets and liabilities that existed and were recognized at the inception of the hedge.

  5. Modify Implementation Issue G25 to clarify that the exception also permits the hedging entity to use the first-payments-received (or first-payments-made) technique in a basis swap hedge to identify the hedged interest receipts from the pre-existing asset or asset portfolio (or the hedged interest payments on the pre-existing liability or liability portfolio).

  6. Reinstate the language from the original tentative guidance that explains the implicit assumptions in the basis swap hedging example in paragraphs 98 and 99 of Statement 133 and emphasize that the hedged risk cannot be interest rate risk.

  7. Modify Implementation Issue G25 to remind constituents that margin variability can be a potential source of ineffectiveness.