Derivatives Implementation Group

Statement 133 Implementation Issue No. E15

Note: On May 1, 2002, the FASB issued the Exposure Draft, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which proposed certain changes to Statement 133 that would have effectively superseded the guidance in this Issue. In its redeliberations following an analysis of comments received on the Exposure Draft, the Board withdrew the proposed changes that would have affected this Issue. Consequently, the guidance in this Issue is not affected by the issuance of FASB Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities.

QUESTION

Assuming it has already adopted Statement 133, can the acquiror in a business combination continue to use the shortcut method of accounting for the hedging relationships of the acquiree that were being accounted for by the acquiree under the shortcut method of accounting at the date of the business combination? (In part, this question entails a determination of whether the business combination results in a new inception date for the combined entity for hedging relationships entered into by the acquiree prior to the consummation of the business combination that remain ongoing at the date of the business combination.)

BACKGROUND

Company A acquires Company B in a business combination. Company A and Company B both adopted Statement 133 prior to the date of the business combination. At the date of the business combination, Company A and Company B both have certain hedging relationships that have met the requirements in paragraph 68 of Statement 133 and that are being accounted for by the respective companies under the shortcut method of accounting. A business combination is accounted for as the acquisition of one enterprise by another enterprise. The acquiring enterprise, Company A, records the assets acquired and liabilities assumed at fair value. Assume that, at the date of the business combination, the fair value of the hedging swaps in Company B's hedging relationships is other than zero.

RESPONSE

No, unless the applicable hedging relationships meet the requirements in paragraph 68 of Statement 133 at the date of the business combination (which would be highly unlikely since the swap's fair value would rarely be zero at that date) and the combined organization chooses to designate the swaps and the hedged items as hedging relationships to be accounted for under the shortcut method. Company A is acquiring the individual assets and liabilities of Company B at the date of the business combination and accordingly any pre-existing hedging relationships of old Company B must be designated anew by the combined entity at the date of the business combination in accordance with the relevant requirements of Statement 133. The concept of purchase accounting follows the accounting for acquisitions of individual assets and liabilities. That is, the combined entity should account for the assets and liabilities acquired in the business combination consistent with how it would be required to account for those assets and liabilities if they were acquired individually in separate transactions. The acquisition method is based on the premise that in an acquisition the acquired entity (Company B) ceases to exist and only the acquiring entity (Company A) survives. Thus, the post-acquisition hedging relationship designated by Company A is a new relationship that has a new inception date. Even in the unlikely circumstance that the new hedging relationship qualifies for the shortcut method, there would be no "continuation" of the shortcut method of accounting that had been applied by the acquired entity.

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.