A Simpler Approach

BY JEFF KUTZ AND SANDY CRAWFORD

We disagree with the hedge-effectiveness testing method described in “Practical Issues in Implementing FASB 133” ( JofA, Mar.01, page 26). Our experience advising companies on interest rate risk and foreign-currency hedging transactions, and our related consulting work on applying FASB Statement no. 133, have led us to draw a substantially different conclusion—that while more than one approach may be employed, the simplest often is the best.

The article states that “the [dollar offset] method does not provide the best measure of a hedge’s expected effectiveness….A correlation analysis is a superior approach….” Our experience shows that choice of the most appropriate test method relies chiefly on the nature of the hedged risk and the type of hedging instrument used. (Statement no 133, in fact, says much the same—in paragraphs 62 and 386–390).

We assist with a great number of hedge transactions and find that in some cases regression or other statistical methods make sense. However, often they are overkill for interest rate hedges whereby all important terms are perfectly matched or only timing differences exist. For many of these situations, the accounting standards (Statement no. 133, paragraph 68, and the Derivatives Implementation Group Issue G9, for example) allow use of simple qualitative assessments that involve neither dollar offset nor statistical tests.

Jeff Kutz and Sandy Crawford
Chatham Financial Corp.
Kennett Square, Pennsylvania

SPONSORED REPORT

Revenue recognition: A complex effort

Implementing the new standard requires careful judgment. Learn how to make significant accounting judgments and document them and collaborate with peers for consistent application.

VIDEO

How to Excel pivot a general ledger

The general ledger is a vast historical data archive of your company's financial activities, including revenue, expenses, adjustments, and account balances. J. Carlton Collins, CPA, shows how to prepare data for, and mine data with, PivotTables.

QUIZ

News quiz: Taking an economic snapshot and looking to the future

Recent news included IRS actions that affect individuals and partnerships and a possibly influential move by a Big Four accounting firm.Take this short quiz to see how much you know about the news.