Derivatives Implementation Group

Statement 133 Implementation Issue No. J2

QUESTION

Do the transition provisions of Statement 133 apply to an intercompany derivative treated as a hedge prior to the initial application of Statement 133 even though the intercompany derivative will not be eligible to be designated as the hedging instrument of certain risks under Statement 133?

BACKGROUND

Guidance presented in Statement 133 Implementation Issue No. E3, "Hedging-General: Hedging with Intercompany Derivatives," discusses the acceptable practices under Statement 133 for hedging with intercompany derivatives.

Prior to the issuance and adoption of Statement 133, entities may have followed a variety of practices in hedging with intercompany derivatives. For example, a parent company's central treasury function may have entered into a derivative contract with a subsidiary to hedge that subsidiary's interest rate risk. The central treasury function would then have entered into a contract with an unrelated third party that would have offset the intercompany derivative, thereby hedging the exposure it had acquired from issuing the intercompany derivative instrument to the affiliate that desired the hedge.

RESPONSE

Yes. The transition provisions in paragraph 52 of Statement 133 apply to intercompany derivatives treated as hedges in the consolidated financial statements prior to the initial application of Statement 133.

Under Statement 133, an intercompany derivative does not qualify in consolidated financial statements as the hedging instrument for hedges of a risk other than foreign exchange risk. However, whether a derivative is designated as a hedging instrument after Statement 133 has been initially applied does not affect the determination of the transition adjustment. The transition guidance assumes that an entity had previously satisfied itself that, with respect to the intercompany derivative, it had an appropriate basis for special hedge accounting treatment under generally accepted accounting principles prior to the date of initial application of Statement 133.

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.