Derivatives Implementation Group

Statement 133 Implementation Issue No. I2

QUESTION

For disclosure purposes, what is the appropriate way to calculate the amount of other comprehensive income to be reclassified into earnings in the coming 12 months when a single derivative is used to hedge multiple cash flow exposures?

BACKGROUND

For derivative instruments that have been designated and have qualified as cash flow hedging instruments and for the related hedged transactions, paragraph 45(b)(2) of Statement 133 requires disclosure of the following:

    A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income, and the estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next 12 months.

When interest rate or commodity swaps are used for cash flow hedges, in effect a single derivative is being used to hedge multiple hedged forecasted transactions because a swap involves multiple cash flows (like a series of forward contracts). For instance, a five-year interest rate swap may be designated as the hedging instrument to hedge the variability in cash flows for each of the resets in a five-year variable-rate borrowing. The fair value of a swap may be the net of both positive discounted cash flows (that is, the right to receive future payments) and negative discounted cash flows (that is, the obligation to make future payments). This could happen, for example, if nearby forward rates were below the fixed rate on the swap and far-term forward rates were above the fixed rate on the swap, in which case an entity could have an expectation of having to make cash outflows on the swap for nearby exposures and to receive cash inflows on the swap for the far-term exposures.

RESPONSE

To measure the amount of other comprehensive income to be reclassified into earnings in the coming 12 months when multiple cash flow exposures are designated as the hedged items for a single derivative, the total amount reported in other comprehensive income (as determined in accordance with paragraph 30(b)) for the hedging relationship first must be allocated to each of the forecasted transactions (hedged items) within the hedging relationship. The allocation method used must be applied consistently and must consider any cumulative gain or loss on the derivative that has been recognized in earnings as hedge ineffectiveness. After the amount reported in other comprehensive income has been allocated to each of the forecasted transactions within the hedging relationship, the entity would sum those estimated amounts to be reclassified into earnings in the coming 12 months. Accordingly, the amount required to be disclosed could be greater than or less than the net amount reported in accumulated other comprehensive income.

EFFECTIVE DATE

The effective date of the implementation guidance in this Issue for each reporting entity is the first day of its first fiscal quarter beginning after July 10, 2001, the date that the Board-cleared guidance was posted on the FASB website.

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.