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.
More from the JofA:
Find us on Facebook
| 
Follow us on Twitter
