By: Carl Kampel
The Financial Accounting Standards Board has approved the use of simplified hedge accounting for private companies for interest rate swaps that economically convert variable-rate debt to fixed-rate debt.
The new approach allows private companies to record swaps at settlement value rather than fair value. The difference between the two being nonperformance risk by the counter party to the swap.
Private companies can apply this standard on a swap-by-swap basis if they meet the following conditions:
- The variable rate on the debt and swap are based on the same index and reset period (i.e. LIBOR, prime rate, etc.).
- There is no floor or cap in the swap that is not also in the debt.
- The fair value of the swap at inception is zero.
- The amount of the swap matches or is less than the amount of the borrowing.
If all of the above conditions are met, the private company can assume the hedge is completely effective and changes in the settlement value of the swap can be recorded in other comprehensive income. Each reporting period, the private company must determine it is probable the counter party will perform its obligation under the swap agreement.
The simplified hedge accounting approach is effective for annual periods beginning after December 15, 2014. Early application is permitted. If a private company has not yet made its financial statements available for issuance for the most recent annual period, it may elect to apply the simplified hedge accounting to those financial statements, which means most private companies will be able to apply this alternative in their 2013 financial statements.
Carl Kampel, a certified public accountant, is the director in charge of professional standards at Ellin & Tucker, an accounting and business consulting firm with offices in Baltimore, Frederick and Belcamp, Maryland and Washington, D.C. He is a member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Financial Reporting Executive Committee. He is also a member of the Board of Directors of the Baltimore Chapter of Financial Executives International and the Maryland Association of CPAs.