FASB Summary of December 13, 2000 Board Meeting Discussion

FASB: Summary of December 13, 2000 Board Meeting Discussion

Derivatives Implementation Group

Summary of December 13, 2000 Board Meeting Discussion on Statement 133 Implementation Issues

Financial instruments: derivatives implementation. The Board decided not to object to the staff's issuing guidance in a question-and-answer format (Q&A) for the following three implementation Issues regarding FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities:

Section H: Foreign Currency Hedges
Issue H8—Measuring the Amount of Ineffectiveness in a Net Investment Hedge
Issue H9—Hedging a Net Investment with a Compound Derivative That Incorporates Exposure to Multiple Risks

Section J: Transition Provisions
Issue J11—Transition Adjustment for Net Investment Hedges

The tentative guidance for the above three Issues was developed based on the results of discussion by the Derivative Implementation Group (DIG) and had been posted on the FASB web site for comment for at least three months.

In discussing the above three Issues the Board made the following decisions:

  • The Board decided that if a cross-currency interest rate swap (as permitted in accordance with Implementation Issue H9) is designated as the hedging instrument in a net investment hedge based on the guidance in Implementation Issue H8, the amount of hedge ineffectiveness should be measured by comparing the change in fair value of the actual cross-currency interest rate swap with the change in fair value of (1) a "hypothetical" receive-floating-rate, pay-floating-rate cross-currency interest rate swap in which the interest rates are based on the same currencies contained in the swap and both legs of the swap have the same repricing intervals and dates or (2) a "hypothetical" receive-fixed-rate, pay-fixed-rate cross-currency interest rate swap.

  • The Board decided that Implementation Issue H8 should permit the assessment and measurement of ineffectiveness in a net investment hedge using a method based on changes in spot exchange rates in addition to the method based on changes in forward exchange rates. The Board decided, however, that an entity must use the same method for all of its net investment hedges; use of the spot-rate-based method for some net investment hedges and the forward-rate-based method for other net investment hedges is not permitted.

  • The Board decided that, if (a) prior to adopting Statement 133, an entity separately accounted for the discount or premium on a forward contract (or the premium on a purchased foreign currency option) designated as a hedge of a net investment in a foreign operation and included the discount or premium in the determination of net income over the life of the forward contract and (b) upon adoption of Statement 133, an entity designates changes in spot exchange rates for the assessment and measurement of ineffectiveness in a net investment hedge, the transition adjustment under Implementation Issue J11 should be reported as a cumulative-effect-type adjustment of net income.