Derivatives Implementation Group
Summary of May 2, 2000
Board Meeting Discussion on Statement 133 Implementation Issues
Derivatives and hedging-proposed amendment of
Statement 133. The Board continued its redeliberations of the
proposed Statement, Accounting for Certain Derivative
Instruments and Certain Hedging Activities,and made the
following decisions.
The Board decided that the "shortcut method" provided
in paragraph 68 of Statement 133 cannot be applied to cash flow
hedge situations in which the cash flows of the hedged item and the
hedging instrument are based on the same index but that index is
not the designated benchmark interest rate. The Board noted,
however, that in some of those situations it will be easily
determined that the hedge is perfectly effective. The Board also
decided that the "shortcut method" cannot be used in fair value
hedge situations in which the variable leg of the interest rate
swap is based on an index that is not the designated benchmark
interest rate.
The Board decided that in calculating the change in
the hedged item's fair value attributable to changes in the
benchmark interest rate, the estimated cash flows used must be
based on the contractual cash flows of the entire hedged item. That
would preclude a method of calculating the hedged item's fair value
that uses all of the hedge item's contractual cash flows initially,
but then backs out cash flows that may be deemed to be related to
the obligor's creditworthiness at inception.
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