FASB Transition Provisions Effect of a Transition Adjustment Included in Accumulated Other Comprehensive Income on the Application of Paragraph 30

FASB: Transition Provisions: Effect of a Transition Adjustment Included in Accumulated Other Comprehensive Income on the Application of Paragraph 30

Derivatives Implementation Group

Statement 133 Implementation Issue No. J16

Title: Transition Provisions: Effect of a Transition Adjustment Included in Accumulated Other Comprehensive Income on the Application of Paragraph 30
Paragraph references: 30, 48, 52(a), 53
Date cleared by Board: March 21, 2001
Date posted to website: April 10, 2001

QUESTION

If upon adoption of Statement 133 an entity designates the same cash flow hedging relationship (same hedging instrument and same forecasted transaction) as it had previously designated, should "the cumulative gain or loss on the derivative from inception of the hedge" used in applying paragraph 30(b)(1) be based solely on the derivative's gains and losses from the date of adoption or should it also include the portion of that derivative's transition adjustment that was reported as a cumulative-effect-type adjustment of accumulated other comprehensive income in accordance with paragraph 52?

BACKGROUND

Paragraph 30(b) states:

    Accumulated other comprehensive income associated with the hedged transaction shall be adjusted to a balance that reflects the lesser of the following (in absolute amounts):

(1)   The cumulative gain or loss on the derivative from inception of the hedge less (a) the excluded component discussed in paragraph 30(a) above and (b) the derivative's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraph 31

(2)   The portion of the cumulative gain or loss on the derivative necessary to offset the cumulative change in expected future cash flows on the hedged transaction from inception of the hedge less the derivative's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraph 31.

That adjustment of accumulated other comprehensive income shall incorporate recognition in other comprehensive income of part or all of the gain or loss on the hedging derivative, as necessary.

RESPONSE

Paragraph 48 of Statement 133 indicates that upon initial application of Statement 133, all hedging relationships must be designated anew; consequently, the portion of a derivative's transition adjustment that was included in the cumulative-effect-type adjustment of accumulated other comprehensive income is not considered to be part of any post-adoption hedging relationship in which that derivative is the hedging instrument. Thus, the application of paragraph 30(b)(1) should not consider any part of the hedging derivative's transition adjustment. The cumulative gain or loss on the derivative from inception of the hedge in paragraph 30(b)(1) should be based solely on the derivative's gains and losses from the date of adoption. In accordance with paragraph 53, any transition adjustment reported as a cumulative-effect-type adjustment in accumulated other comprehensive income shall be subsequently reclassified into earnings in a manner consistent with paragraph 31.

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.