FASB Summary of may 2, 2000 Board Meeting Discussion

FASB: Summary of may 2, 2000 Board Meeting Discussion

Derivatives Implementation Group

Summary of May 2, 2000 Board Meeting Discussion on Statement 133 Implementation Issues

Derivatives and hedging-proposed amendment of Statement 133. The Board continued its redeliberations of the proposed Statement, Accounting for Certain Derivative Instruments and Certain Hedging Activities,and made the following decisions.

The Board decided that the "shortcut method" provided in paragraph 68 of Statement 133 cannot be applied to cash flow hedge situations in which the cash flows of the hedged item and the hedging instrument are based on the same index but that index is not the designated benchmark interest rate. The Board noted, however, that in some of those situations it will be easily determined that the hedge is perfectly effective. The Board also decided that the "shortcut method" cannot be used in fair value hedge situations in which the variable leg of the interest rate swap is based on an index that is not the designated benchmark interest rate.

The Board decided that in calculating the change in the hedged item's fair value attributable to changes in the benchmark interest rate, the estimated cash flows used must be based on the contractual cash flows of the entire hedged item. That would preclude a method of calculating the hedged item's fair value that uses all of the hedge item's contractual cash flows initially, but then backs out cash flows that may be deemed to be related to the obligor's creditworthiness at inception.