FASB Summary of February 23, 2000 Board Meeting Discussion

FASB: Summary of February 23, 2000 Board Meeting Discussion

Derivatives Implementation Group

Summary of February 23, 2000 Board Meeting Discussion on Statement 133 Implementation Issues

Derivatives and hedging-possible amendment of Statement 133. The Board discussed whether to permit LIBOR swap rates to be the hedged risk in a hedge of interest rate risk. The Board also discussed transition issues related to hedging interest rate risk and issues related to its decision at the February 16, 2000 Board meeting to further expand the normal purchases and normal sales exception to contracts that meet the market mechanism provisions contained in paragraphs 9(b) and 57(c)(2) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

The Board decided to make a practical exception to allow entities to designate LIBOR swap rates as the hedged risk in a hedge of interest rate risk. That decision follows the January 18, 2000 Board decision to incorporate credit sector spread in credit risk rather than in market interest rate risk and to interpret market interest rates as the risk-free rate of interest. In the United States, currently, the definition of interest rate risk would include only the interest rates on direct Treasury obligations of the U.S. government and the LIBOR swap rate.

The Board also decided that entities that have adopted Statement 133 prior to the effective date of the proposed amendment should dedesignate any hedging relationship based on the definition of market interest rates as interpreted in Statement 133 Implementation Issue No. E1, "Hedging the Risk-Free Rate." An entity can then simultaneously designate a hedging relationship under the new definition of interest rates (which include the risk-free rate or LIBOR swap rates in the United States). The change would be made only on a prospective basis.

The Board decided that contracts that require cash settlement on a daily or other periodic basis have the characteristic described as net settlement in the definition of a derivative in Statement 133 and, therefore, are derivatives that would not qualify for the normal purchases and normal sales exception in paragraph 10(b) of Statement 133.