NEWS RELEASE 07/24/07

FASB Issues Proposal to Clarify the “Shortcut Method” of Hedge Accounting

Norwalk, CT, July 24, 2007—The Financial Accounting Standards Board has issued proposed Statement 133 Implementation Issue No. E23, "Issues Involving the Application of the Shortcut Method under Paragraph 68." This proposal provides guidance on certain practices involved in the application of one technique for determining hedge accounting, commonly referred to as the shortcut method. Designed to promote consistency in the practice of determining when an entity qualifies for the shortcut method, the proposal also provides investors and others with better information about how the shortcut method affects a company's financial statements.

The shortcut method prescribes a set of conditions that must be met in order for a reporting entity to assume that certain hedging relationships of interest rate risk would result in no ineffectiveness. Using the shortcut method vastly simplifies the necessary calculations involved in hedge accounting, as it assumes that the change in value of the swap is a "perfect proxy" for the change in value of the hedged item, thereby resulting in no income statement volatility (or "ineffectiveness").

"Currently, there is diversity in the way the shortcut method is applied by preparers of financial statements. That diversity has resulted in differences in financial statement information for similar transactions. This proposal seeks to reduce that diversity," said Louis Fanzini, FASB financial services industry fellow. "This proposal also is designed to reduce complexity in a way that makes it easier for preparers to understand the application of the shortcut method, resulting in clearer financial statements for the investor."

Open Due Process

The Board is seeking written comments on the proposal by September 21, 2007. Parties interested in providing input on the proposal should submit their comments by email to director@fasb.org, File Reference No. 1530-100. Those without email may send their comments to:

 

Technical Director—File Reference No. 1530-100
Financial Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, Connecticut 06856-5116

 


About the U.S. Financial Accounting Standards Board

Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit our website at www.fasb.org.