GASB Proposal: Hedge Accounting Could Continue After Assignment

GASB on Monday issued an exposure draft that proposes amendments to the requirements of Statement no. 53 to clarify what constitutes a termination event for accounting and financial reporting purposes. The amendment would allow hedge accounting to continue, if certain conditions are met, when a swap counterparty or a swap counterparty’s credit support provider is replaced through an assignment or an in-substance assignment.

Statement no. 53, Accounting and Financial Reporting for Derivative Instruments, provides for the use of hedge accounting for derivatives that are effective hedges. Hedge accounting entails reporting fair value changes of a hedging derivative as either deferred inflows or deferred outflows of resources, rather than recognizing those changes in investment income. The statement requires that hedge accounting cease, and all accumulated deferred amounts be reported in investment income, when a hedging derivative is terminated.

Under Statement no. 53, questions have arisen regarding situations where a government has entered into a hedging interest rate swap or a hedging commodity swap and the swap counterparty or the swap counterparty’s credit support provider commits or experiences either an act of default or a termination event as both are described in the swap agreement. When a swap counterparty or a swap counterparty’s credit support provider is replaced through an assignment or an in-substance assignment, GASB concluded that the government’s economic position remains unchanged. Therefore, the board is proposing that, when certain conditions are met, the use of hedge accounting should not be terminated.

The provisions of the proposal are limited to when a swap represents a liability of a government, the replacement of the counterparty or credit support provider meets the criteria of an assignment or in-substance assignment, and other swap terms are unchanged. When this is the case, the hedging derivative would not be considered to be terminated for accounting and financial reporting purposes, and hedge accounting would continue to apply.

Comments on the ED, Derivative Instruments: Application of Hedge Accounting Termination Provisions (an amendment of GASB Statement No. 53), are due April 15. The provisions of the proposed amendment would be effective for financial statements for periods beginning after June 15, 2011. Earlier application is encouraged.

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