Derivatives Implementation Group
Summary of December 20,
2000 Board Meeting Discussion on Statement 133 Implementation
Issues
Financial instruments: derivatives
implementation. The Board decided not to object to the staff's
issuing revised guidance in a question-and-answer format (Q&A)
for Implementation Issue No. G13, "Hedging the Variable Interest
Payments on a Group of Floating-Rate Interest-Bearing Loans,"
related to FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The issue has previously
been discussed by the FASB's Derivatives Implementation Group and a
previous version had been posted on the FASB Website.
The revised Issue has been expanded to address a loan
within the group of loans (whose interest payments are the hedged
forecasted transactions) being sold or experiencing an unexpected
change in its expected cash flows due to credit difficulties as
well as a loan within the group that is prepaid. The revised
proposed guidance indicates that an entity cannot conclude
that the original cash flow hedging relationships have remained
intact if the composition of the group of loans whose interest
payments are the hedged forecasted transactions is changed by
replacing the principal amount of some of the originally specified
loans with similar floating-rate interest-bearing loans.
The revised Issue also addresses a new question:
- Company A wishes to hedge its interest rate exposure to changes
in the quarterly interest receipts on $100 million principal of
those LIBOR-indexed floating-rate loans by entering into a
three-year interest rate swap that provides for quarterly net
settlements based on Company A receiving a fixed interest rate on a
$100 million notional amount and paying a floating LIBOR-based rate
on a $100 million notional amount. In identifying the hedged
forecasted transactions in cash flow hedges of interest rate risk,
can Company A designate the hedging relationships as hedging the
risk of changes (attributable to interest rate risk) in Company A's
first LIBOR-based interest payments received during each four-week
period that begins one week before each quarterly due date for the
next three years that, in the aggregate for each quarter, are
interest payments on $100 million principal of its then existing
LIBOR-indexed floating-rate loans?
The proposed guidance for Question 1 indicates that,
in a cash flow hedge of interest rate risk, an entity may identify
the hedged forecasted transactions as the first LIBOR-based
interest payments received by that entity during each four-week
period that begins one week before each quarterly due date for the
next three years that, in the aggregate for each quarter, are
payments on $100 million principal of its then existing
LIBOR-indexed floating-rate loans. The LIBOR-based interest
payments received by the entity after it has received payments on
$100 million aggregate principal would be unhedged interest
payments for that quarter.
Issue G13 does not address cash flow hedging
relationships in which the hedged risk is the risk of overall
changes in the hedged cash flows related to an asset or liability,
as discussed in paragraph 29(h)(1).
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