FASB Foreign Currency Hedges Accounting for Premium or Discount on a Forward Contract Used as the Hedging Instrument in a Net Investment Hedge

FASB: Foreign Currency Hedges: Accounting for Premium or Discount on a Forward Contract Used as the Hedging Instrument in a Net Investment Hedge

Derivatives Implementation Group

Statement 133 Implementation Issue No. H6

Title: Foreign Currency Hedges: Accounting for Premium or Discount on a Forward Contract Used as the Hedging Instrument in a Net Investment Hedge
Paragraph references: 42, 474-477
Date cleared by Board: November 23, 1999

QUESTION

Under Statement 133, may an entity choose to defer the premium or discount on a foreign currency forward contract that is used to hedge the foreign exchange exposure of the entity's net investment in foreign operations and amortize that amount to earnings ratably over the period of the contract?

BACKGROUND

Paragraph 474 of Statement 133 provides the following as the Board's objectives in providing hedge accounting for hedges of foreign currency exposures:

  1. To continue to permit hedge accounting for the types of hedged items and hedging instruments that were permitted hedge accounting under Statement 52

  2. To increase the consistency of hedge accounting guidance for foreign currency hedges and other types of hedges by broadening the scope of foreign currency hedges that are eligible for hedge accounting, as necessary.

Paragraph 18 of Statement 52 had provided the reporting entity the option to amortize the discount or premium of a derivative that is used as the hedging instrument.

RESPONSE

No. Statement 133 does not permit the premium or discount (also referred to as the forward points) on a foreign currency forward contract that is used to hedge the foreign exchange exposure of the entity's net investment in foreign operations to be accounted for separately. It supersedes paragraph 18 in Statement 52 and requires all derivatives to be reported at fair value.

Paragraph 42 of Statement 133 provides that, "The gain or loss on a hedging derivative instrument...that is designated as, and is effective as, an economic hedge of the net investment in a foreign operation shall be reported in the same manner as a translation adjustment to the extent it is effective as a hedge." That paragraph does not provide an entity the option of separately amortizing the premium or discount on the forward exchange contract to earnings ratably over the period of the contract.

The above response has been authored by the FASB staff and represents the staff's views, although the Board has discussed the above response at a public meeting and chosen not to object to dissemination of that response. Official positions of the FASB are determined only after extensive due process and deliberation.