Derivatives Implementation Group
Summary of November 20, 2002 Board Meeting Discussion on the Proposed Amendment to Statement 133
Financial instruments: derivatives implementation. At the November 20, 2002 meeting, the Board continued its redeliberations of issues raised in connection with the accounting for derivative instruments in the FASB Exposure Draft, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. The Board redeliberated the application of the shortcut method previously discussed at the September 11, 2002 meeting.
The Board decided that in order to qualify for the shortcut method, an entity would be required to receive the premium for the written call option embedded in the swap and pay the premium for the purchased call option embedded in the interest-bearing asset or liability in a similar manner. In particular, the Board decided that for callable debt in which the premium for the purchased call option is incorporated as an adjustment of the stated interest rate rather than as a discounted issue price for the debt, paragraph 68(b) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, would require that the hedging instrument (composed of an interest rate swap and an embedded mirror-image call option) have a fair value of zero at the inception of the hedge.
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