1999 - 2000 Financial
Engineering Series
Chapter 2
Regulatory Requirements
| Description | IAS 39 | FAS 133 |
| Applicability |
Applied by all enterprises to all financial instruments (paragraphs 1, 5,
6) |
Applied by all entities to derivative instruments and hedging activities (paragraph 5) |
| A1. Definitions | ||
| Derivative Instruments: | A derivative instrument is defined by these three characteristics: | |
| 1. Underlying | Its value changes in response to changes in a specified underlying
variable. It usually has a notional amount or requires a fixed payment, where: Underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable; Notional amount is an amount of currency, a number of shares, a number of units of weight or volume, or other units specified in the contract; Fixed payment is required as a result of some future event unrelated to a notional amount. paragraphs 10a & 13) |
It has one or more underlyings; notional amounts or payment provisions or
both, where: Underlying has the same meaning as IAS 39, except that it makes explicit reference also to an insurance index or catastrophe loss index and a climatic or geological condition; Notional amount is a number of currency units, shares, bushels, pounds or other units specified in the contract; Payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. (paragraphs 6a, 7 & 57a) |
| 2. Minimal Initial Investment |
It requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions (IAS 39: paragraph 10b, FAS 133: paragraph 6b, see also Appendix A, paragraph 57b) | |
| 3. Net Settlement |
It is settled at a future date (paragraph 10c) |
Its terms require or permit net settlement, by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement (paragraph 6c, see also paragraph 57c) |
| Description | IAS 39 | FAS 133 |
| A2. Exceptions | ||
| 1. Business Combinations |
Contracts for contingent consideration in a business combination (See
paragraphs 65-76 of IAS 22); (paragraph 1g) |
Contracts issued by a reporting entity as contingent consideration from a business combination as addressed in APB Opinion No. 16 (paragraph 11c) |
| 2. Shareholder's Equity |
Those interests in subsidiaries, associates, and joint ventures that are
accounted for under IAS 27, IAS 28 and IAS 31 (paragraph 1a); Equity instruments issued by the reporting enterprise that are classified as shareholder's equity (note exceptions in paragraph 1e) |
Contracts issued or held by that reporting entity that are both:
Indexed to its own stock and; classified in stockholders' equity in its statement of financial position. (paragraph 11a) |
| 3. Leases |
Rights and obligations under leases to which IAS 17 applies (note exceptions in paragraph 1b) | Derivatives that serve as impediments to sales and lease accounting (paragraph 10f) |
| 4. Employee Benefits |
Employers' assets and liabilities under employee benefit plans to which
IAS 19 applies (paragraph 1c) |
Contracts issued by the entity in connection with stock-based compensation arrangements addressed in FAS 123 (paragraph 11b) |
| 5. Insurance Contracts |
Rights and obligations under insurance contracts as defined in paragraph 3
of IAS 32 (note exceptions in paragraph 1d) |
Certain insurance contracts that entitle the holder to be compensated if, due to an identifiable insurable event (other than a change in price), the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk (note exceptions in paragraph 10c) |
| 6. Financial Guarantees |
Financial guarantee contracts (note exceptions in paragraph 1f) |
Financial guarantee contracts that provide for payments to be made only to reimburse the guaranteed party for a loss incurred because the debtor fails to pay when payment is due (note exceptions in paragraph 10d) |
| 7. Physical Variables |
Contracts that require a payment based on physical variables (note
exceptions in paragraph 1h) |
Certain non-exchange-traded contracts whereby settlement is based on climatic or geological or other physical variables (paragraph 10e, 58c) |
| 8. Regular Way securities or Normal purchases/sales |
"Regular-way" security trades (paragraph 10a, 58a); Normal purchases and normal sales (paragraph 10b, 58b) |
|
| Description | IAS 39 | FAS 133 |
| A3. Embedded Derivatives | ||
| Definition |
An embedded derivative causes some or all of the cash flows that otherwise would be required by the contract to be modified based on one or more underlyings (IAS 39: paragraph 22, FAS 133: paragraph 12) | |
| An embedded derivative should be separated from the host contract and accounted for as a derivative instrument if it fulfills the following characteristics: | ||
| 1. Relation to Host Contract |
The economic characteristics and risks of the
embedded derivative instrument are not closely related to the economic characteristics and
risks of the host contract (IAS 39: paragraph 23a, FAS 133: paragraph 12a) Note that in FAS 133 the criteria are stated as "not clearly and closely related" (paragraph 12a & 60) |
|
| 2. Hybrid Instrument Not Measured at Fair Value | The hybrid instrument is not measured at fair value with changes in fair value reported in net profit or loss (IAS 39: paragraph 23c, FAS 133: paragraph 12b) | |
| 3. Embedded Derivative Meets Definition of a Derivative |
A separate instrument with the same terms as the embedded derivative instrument would meet the definition of a derivative (IAS 39: paragraph 23b, FAS 133: paragraph 12c) | |
| If an embedded derivative is separated, the host contract itself should be accounted for: | ||
| Under IAS 39 if it is by itself a financial instrument; and in
accordance with other appropriate International Accounting Standards if otherwise. (paragraph 23) |
Based on generally accepted accounting principles applicable
to instruments of that type that do not contain embedded derivative instruments (paragraph
16) |
|
| An enterprise that is required to separate an embedded derivative from its host contract but is unable to do so should: | ||
| Treat the entire combined contract as a financial instrument
held for trading (paragraph 26) |
The entire contract should be measured at fair value with gain or loss recognized in earnings, but it may not be designated as a hedging instrument pursuant to this Statement (paragraph 16) | |
| The following examples of embedded derivatives should be accounted for separately from the host contract: | ||
| 1. Put/Call Equity Option on Host Equity Instrument |
A put/call option on an equity instrument not closely related
to the host equity instrument (paragraph 24a, 25b) |
A put option that enables the holder to require the issuer of an equity instrument to reacquire that equity instrument for cash or other assets which are not clearly and closely related to the equity instrument. That put option should also be separated from the host contract by the issuer of the equity instrument except in those cases in which the put option is not considered to be a derivative instrument pursuant to paragraph 11(a) because it is classified in stockholders' equity. A call option embedded in the related equity instrument would not be separated from the host contract by the issuer, but would be otherwise for the holder of the related equity instrument (paragraph 61e) |
| 2. Option to Extend Debt Maturity |
An option to extend the maturity date of debt not closely
related to the host debt contract (note exception in paragraph 24c) |
Variable Annuity Products are generally not subject to the scope of FAS 133 except for specific components such as equity-index-based interest annuity and certain payment alternatives at the end of the accumulation period (paragraph 200) |
| 3. Equity-indexed interest payments |
Equity-indexed interest or principal payments not closely related to the host debt instrument or insurance contract (paragraph 24d) | An equity-related derivative embedded in an equity-indexed debt instrument (paragraph 61h). See paragraph 185 for an example of an Equity-Indexed Note |
| 4. Commodity-linked Notes |
Commodity-indexed interest or principal payments not closely
related to the host debt instrument or insurance contract (paragraph 24e) |
A commodity-related derivative embedded in a commodity-indexed
debt instrument must be separated from the noncommodity host contract (paragraph 61i) See paragraph 187 for an example of a Crude Oil Knock-in Note and paragraph 188 for an example of a Gold-Linked Bull Note |
| 5. Equity Conversion Feature |
Equity conversion feature embedded in a debt instrument not
closely related to the host debt instrument (paragraph 24f) |
Specific Equity-Linked Bond (paragraph 193). For a debt
security that is convertible into a specified number of shares of the debtor's common
stock or another entity's common stock, the conversion option must be separated from the
debt host contract. That accounting applies only to the holder if the debt is
convertible to the debtor's common stock. (paragraph 61k) See further paragraph 199 for an example of a Convertible Debt Note that this should not be separated if the option is indexed to the issuer's own stock and a separate instrument with the same terms would be classified in stockholders' equity in the statement of financial position, so that the written option is not considered a derivative instrument for the issuer under paragraph 11a |
| 6. Call/Put Debt Option |
An embedded call or put debt option not closely related to the
host debt contract issued at a significant discount or premium (paragraph 24g) |
Call/put options that can accelerate the repayment of
principal on a debt instrument are considered to be clearly and closely related to a debt
instrument that requires principal repayments unless both (1) the debt involves a
substantial premium or discount and (2) the put/call option is only contingently
exercisable (paragraph 61d) See paragraph 186 for an example of a Variable Principal Redemption Bond |
| 7. Credit-linked Debt |
Embedded credit derivatives (not closely related to the host
debt instrument) which allow the beneficiary to transfer the credit risk of a certain
asset to the guarantor (paragraph 24h) |
Credit-sensitive payments - The related embedded derivative
would not be separated from the host contract for debt instruments that have the interest
rate reset in the event of (1) default, (2) a change in the debtor's published credit
rating, or (3) a change in the debtor's creditworthiness indicated by a change in its
spread over Treasury bond (paragraph 61c) See paragraph 190 for an example of a credit-sensitive bond. |
| The following examples of embedded derivatives should not be accounted for separately from the host contract: | ||
| 1. Composite Coupon |
The embedded derivative is linked to an interest-rate/index
that can change the amount of interest that would otherwise be paid or received on the
host debt contract (paragraph 25a) |
(a) Inverse Floater (paragraph 178) (b) Levered Inverse Floater (paragraph 179) Note that the application for (a) and (b) depends on specific circumstances. They should be separated if the embedded derivative could potentially result in the investor's not recovering substantially all of its initial recorded investment. In addition for (b), this should be separated if there is a possibility of the embedded derivative increasing the investor's rate of return on the host contract to an amount that is at least double the initial rate of return on the host contract Delevered Floater (paragraph 180) Range Floater (paragraph 181) Ratchet Floater (paragraph 182) |
| 2. Embedded Cap/Floor |
An embedded floor or cap on interest rates which is closely related to the interest rate on the host debt as the cap is at or above the market interest rate or if the floor is at or below the market interest rate when the instrument is issued, and the cap or floor is not leveraged in relation to the host instrument (paragraph 25b) | Fixed-to-Floating Note (paragraph 183) |
| 3. Foreign Currency |
A stream of principal or interest payments that are
denominated in a foreign currency (paragraph 25c) |
Dual Currency Bond (paragraph 194) Short-Term Loan with a Foreign Currency Option (paragraph 195) Note that this applies only if both the principal payment and the interest payments on the loan had been payable only in a fixed amount of a specified foreign currency, in which case remeasurement will be done according to FAS 52 (refer to paragraph 194). However, foreign currency options not clearly and closely related to issuing a loan should be separated (refer to paragraph 195.) |
| 4. Non-Financial Contracts |
The host contract is not a financial instrument and it requires payments denominated in (1) the currency of the primary economic environment in which any substantial party to that contract operates or (2) the currency in which the price of the related good or service that is acquired is denominated in international commerce (IAS39: paragraph 25d, FAS 133: paragraph 15) | |
| 5. Prepayment Options |
A prepayment option with an exercise price that would not result in a significant gain or loss (paragraph 25e) | Step-up Bond (paragraph 189) |
| 6. Mortgage-Related Prepayment Options |
Prepayment options embedded in interest-only strips or principal-only strips that (1) initially resulted from separating the right to receive contractual cash flows of a financial instrument that, in and of itself, did not contain an embedded derivative and that (2) does not contain any terms not present in the original host debt contract (paragraph 25f) | Same as IAS 39 (paragraph 14) Participating Mortgage
(paragraph 198) |
| 7. Inflation-indexed Rentals |
With regard to a host contract that is a lease, the embedded
derivative is an inflation-related index such as an index of lease payments to a consumer
price index (provided that the lease is not leveraged and the index relates to inflation
in the enterprise's own economic environment); contingent rentals based on related sales
and variable interest rates (paragraph 25g) |
Inflation indexed rentals Contingent rentals based on related sales Contingent rentals based on a variable interest rate (paragraph 61j) Inflation Bond (paragraph 191) Lease Payment in Foreign Currency (paragraph 196) Note that this should be separated if the lease payments are specified in a currency unrelated to each party's functional currency A similar logic applies to Certain Purchases in a Foreign Currency, when the embedded currency derivative is specified in a currency unrelated to each party's functional currency (paragraph 197) |
| 8. Leverage |
An interest/rate index that does not change the net interest payments that otherwise would be paid on the host contract in such a way that the holder would not recover substantially all of its recorded investment; or where a derivative is a liability, the issuer would pay a rate more than twice the market rate at inception (paragraph 25h) | Disaster Bonds (paragraph 192) Note that his should be separated if the option contract is indexed to a specified disaster experience Indexed Amortizing Note (paragraph 184) |
| Description | IAS 39 | FAS 133 |
| B1. Recognition | ||
| 1. Initial Recognition |
An initial recognition of a financial asset or liability shall be measured at fair value (IAS 39: paragraph 66; FAS 133: paragraph 17) | |
| 2. Subsequent Recognition |
After initial recognition, an enterprise should measure all derivatives
that are assets at their fair values (paragraph 69) After initial recognition, an enterprise should measure derivatives that are liabilities at fair value, except for a derivative liability that is linked to and that must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured, which should be measured at cost. Financial liabilities that are designated as hedged items are subject to measurement under the hedge accounting provisions in paragraphs 121-165 (paragraph 93) |
The accounting for subsequent changes in the fair value of a derivative
depends on whether it has been designated and qualified as part of a hedging relationship
and, if so, on the reason for holding it. Either all or a proportion of a derivative
may be designated as the hedging instrument. (paragraph 18) |
| Description | IAS 39 | FAS 133 |
| B2. Measurement | ||
| 1. Reliable Measurement of Fair Value |
The fair value of a financial instrument can be reliably measured if: (1) the variability in the range of reasonable fair value estimates is not significant for that instrument; or (2) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value (paragraph 95) Examples of a reliable measurement of fair value include: a financial instrument for which there is a published price quotation in an active public securities market for that instrument, a debt instrument that has been rated by an independent rating agency and whose cash flows can be reasonably estimated, and a financial instrument for which there is an appropriate valuation model and for which the data inputs (from active markets) to that model can be reliably measured. (paragraph 96) |
Expected future cash flows used to estimate fair value shall be the best
estimate based on reasonable and supportable assumptions and projections. In doing so, all available evidence will have to be considered. The weight given to the evidence shall be commensurate with the extent to which the evidence can be verified objectively. If a range is estimated for either the amount or the timing of possible cash flows, the likelihood of possible outcomes shall be considered in determining the best estimate of future cash flows. (paragraph 17) |
| 2. Definition and Underlying Assumption |
The fair value of a financial asset or liability is defined to be the
amount as determined by one of several generally accepted methods (paragraph 97). Fair value is not the amount that an enterprise would receive or pay in a forced transaction, involuntary liquidation, or distress sale. However, an enterprise may take its current circumstances into account in determining the fair values of its financial assets and financial liabilities (paragraph 98) |
Fair value is defined to be the amount at which an asset (liability) could
be bought (incurred) or sold (settled) in a current transaction between willing parties,
that is, other than in a forced or liquidation sale (Appendix F, paragraph 540) |
| 3. Evidence of Fair Value |
(1) The best evidence of fair value is the existence of published price
quotations in an active market. (a) The appropriate quoted market price for an asset held or liability to be issued is usually the current bid price and, for an asset to be acquired or liability held, the current offer or asking price. (b) When current bid and offer prices are unavailable, the price of the most recent transaction may provide evidence of the current fair value provided that there has not been a significant change in economic circumstances between the transaction date and the reporting date. (c) When an enterprise has matching asset and liability positions, it may use mid-market prices. (paragraph 99) (2) When a quoted market price is not available, estimation techniques may be used - which include reference to the current market value of another instrument that is substantially the same, discounted cash flow analysis, and option pricing models (paragraph 100) |
Quoted market prices in active markets are the best evidence of fair value
and should be used as the basis for the measurement, if available. If a quoted
market price is available, the fair value is the product of the number of trading units
times the market price. When a quoted market price is not available, the estimate of
fair value should be based on the best information available in the circumstances. The estimate of fair value should consider prices for similar assets or similar liabilities and the results of valuation techniques to the extent available in the circumstances (Appendix F, paragraph 540; FAS 107, paragraph 11) |
| 4. Valuation Techniques |
Valuation techniques should incorporate the assumptions that market
participants would use in their estimates of fair values, i.e., assumptions about
prepayment rates, rates of estimated credit losses, and interest or discount rates
(paragraph 97) |
Valuation techniques should be consistent with the objective of measuring fair value and should incorporate assumptions that market participants would use in their estimates of values, future revenues, and future expenses, including assumptions about interest rates, default, prepayment, and volatility. Examples include the present value of estimated expected future cash flows using discount rates commensurate with the risks involved, option-pricing models, matrix pricing, option-adjusted spread models, and fundamental analysis (Appendix F, paragraph 540) |
| Description | IAS 39 | FAS 133 |
| B3. Gains and Losses | ||
| A recognized gain or loss arising from a change in the fair value of a financial asset or financial liability that is not part of a hedging relationship should be reported as follows: | ||
| 1. Trading Securities |
Should be included in earnings (IAS 39: paragraph 103a,
FAS 115; paragraph 13) |
|
| 2. Available-for-sale Securities |
Should be either: included in earnings for the period in which it arises;
or recognized directly in equity, through the statement of changes in equity (see IAS 1, paragraphs 86-88), until the financial asset is sold, collected or otherwise disposed of, or until the financial asset is determined to be impaired (see paragraphs 117-119), at which time the cumulative gain or loss previously recognized in equity should be included in earnings for the period. (paragraph 103b) |
Should be excluded from earnings and reported as a net amount in a
separate component of shareholders' equity until realized (FAS 115, paragraph 13) |
| 3. Settlement-date accounting |
If an enterprise recognizes purchases of financial assets using settlement
date accounting (see paragraph 30), any change in the fair value of the asset to be
received during the period between the trade date and the settlement date is not
recognized for assets carried at cost or amortized cost (other than impairment losses). For assets remeasured to fair value, the change in fair value should be recognized in earnings or in equity, as appropriate under paragraph 103. (paragraph 106) |
FASB left out the issue of trade date versus settlement date accounting
and thus excluded forward contracts for 'regular-way' security trades from the scope of
this Statement (Appendix C, paragraph 274) |
| 4. Impairment |
A financial asset is impaired if its carrying amount is greater than its
estimated recoverable amount (paragraph 109). If there is objective evidence of impairment, and the loss on a financial asset carried at fair value has been recognized directly in equity in accordance with paragraph 103(b)(ii), the cumulative net loss that had been recognized directly in equity should be removed from equity and recognized in earnings for the period even though the financial asset has not been derecognized (paragraph 117). The amount of the loss that should be removed from equity and reported in earnings is the difference between its acquisition cost (net of any principal repayment and amortization) and current fair value (for equity instruments) or recoverable amount (for debt instruments), less any impairment loss on that asset previously recognized in earnings. The recoverable amount of a debt instrument remeasured to fair value is the present value of expected future cash flows discounted at the current market rate of interest for a similar financial asset (paragraph 118) If, in a subsequent period, the fair value or recoverable amount of the financial asset carried at fair value increases and the increase can be objectively related to an event occurring after the loss was recognized in earnings, the loss should be reversed, with the amount of the reversal included in earnings for the period (paragraph 119). |
No explicit reference is made to the impairment of financial instruments
not in a hedging relationship designated under FAS 133, except for giving an example that
they should be treated according to the impairment provisions given by other applicable
Financial Accounting Statements (paragraph 495) |
| Description | IAS 39 | FAS 133 |
| C1. Hedging Relationship | ||
| No hedging |
It should be accounted for under the appropriate accounting provisions set forth by IAS 39 for financial assets and liabilities (paragraphs 103, 108 & 165) | The gain or loss shall be recognized in earnings (paragraph 18a) |
| Definition of a Hedge | ||
| 1. Fair Value Hedge |
Same as FAS 133 except that the hedge has also to affect reported net
income (paragraph 137a) |
A hedge of the exposure to changes in the fair value of a recognized asset or liability, or an identified portion thereof, that is attributable to a particular risk (paragraph 20) |
| 2. Cash Flow Hedge |
Same as FAS 133 except that the hedge will also have to affect reported net profit or loss. A hedge of an unrecognized firm commitment to buy or sell an asset at a fixed price in the enterprise's reporting currency is accounted for as a cash flow hedge even though it has a fair value exposure. (paragraph 137b) | A hedge of the exposure to variability in expected future cash flows that
is attributable to a particular risk. The exposure may be associated with an
existing recognized asset or liability or a forecasted transaction. (paragraph 28) |
| 3. Foreign Currency Hedge |
As defined in IAS 21 (paragraph 137c) |
FAS 133 retains the functional currency concept in Statement 52 (paragraph 36) |
| Hedging Instruments | ||
| 1. Hedging Instruments against Foreign Currency Risk |
A non-derivative financial asset or liability may be designated as a
hedging instrument, for hedge accounting purposes, only for a hedge of a foreign currency
risk (paragraph 122) Held-to-maturity investments carried at amortized cost may be effective hedging instruments with respect to risks from changes in foreign currency exchange rates (paragraph 125) A financial asset/liability whose fair value cannot be reliably measured cannot be a hedging instrument except in the case of a nonderivative instrument (a) that is denominated in a foreign currency, (b) that is designated as a hedge of foreign currency risk, and (c) whose foreign currency component is reliably measurable (paragraph 126) |
A derivative instrument or a nonderivative financial instrument that may
give rise to a foreign currency transaction gain or loss under Statement 52 can be
designated as hedging changes in the fair value of an unrecognized firm commitment, or a
specific portion thereof, attributable to foreign currency exchange rates (paragraph 37) A nonderivative financial instrument shall not be designated as the hedging instrument in a fair value hedge of the foreign currency exposure of an available-for-sale security. A derivative instrument can be designated as hedging the changes in the fair value of an available-for-sale debt security attributable to changes in foreign currency exchange rates. (paragraph 38) A nonderivative financial instrument shall not be designated as a hedging instrument in a foreign currency cash flow hedge (paragraph 40) A derivative instrument or a nonderivative financial instrument that may give rise to a foreign currency transaction gain or loss under Statement 52 can be designated as hedging the foreign currency exposure of a net investment in a foreign operation (paragraph 42) |
| 2. Written Options |
A written option is not a hedging instrument unless it is designated as an
offset to a purchased option, including one that is embedded in another financial
instrument, for example, a written option used to hedge callable debt (paragraph 124) A purchased option qualifies as a hedging instrument as it has potential gains equal to or greater than losses and, therefore, has the potential to reduce profit or loss exposure from changes in fair values or cash flows (paragraph 124) |
If a written option is designated as hedging a recognized asset or
liability / the variability in cash flows for a recognized asset or liability, the
combination of the hedged item and the written option provides at least as much potential
for favorable cash flows as exposure to unfavorable cash flows (see further paragraph 20c
or 28c for the test details) |
| 3. External Parties |
For hedge accounting purposes, only derivatives that involve a party
external to the enterprise can be designated as hedging instruments. Although
individual companies within a consolidated group or divisions within a company may enter
into hedging transactions with other companies within the group or divisions within the
company, any gains and losses on such transactions are eliminated on consolidation.
Therefore, such intra-group or intra-company hedging transactions do not qualify for hedge
accounting treatment in consolidation. (paragraph 134) |
There are no explicit reference to the requirement that the hedging
instrument must involve an external party. See paragraphs 29c and 36 for the requirement to involve an external party in the hedged item, with the only exception for forecasted intercompany foreign-currency-denominated transaction as referred to by paragraph 40 |
| 4. Miscellaneous |
If a hedging instrument is used to modify the interest receipts or
payments associated with a recognized financial asset or liability from one variable rate
to another, the hedging instrument must be a link between an existing designated
asset with variable cash flows and an existing designated liability with variable cash
flows and be highly effective at achieving offsetting cash flows (See further paragraph
28d for the definition of a link) A nonderivative instrument, such as a Treasury note, shall not be designated as a hedging instrument for a cash flow hedge (paragraph 28d) |
|
| Hedged Item | ||
| 1. Recognized Asset or Liability |
A hedged item can be a recognized asset or liability, an unrecognized firm
commitment, or a forecasted transaction (paragraph 127) |
A hedged item is specifically identified as either all or a specific portion of a recognized asset or liability or of an unrecognized firm commitment (paragraph 21a) |
| 2. Single Asset or Liability vs Portfolio |
The hedged item can be (a) a single asset, liability, firm commitment, or forecasted transaction or (b) a group of assets, liabilities, firm commitments, or forecasted transactions with similar risk characteristics (paragraph 127) | The hedged item is a single asset or liability (or a specific portion
thereof) or is a portfolio of similar assets or a portfolio of similar liabilities (or a
specific portion thereof) (paragraph 21a) |
| 3. Held-to-Maturity Investment |
Unlike originated loans and receivables, a held-to-maturity investment
cannot be a hedged item with respect to interest-rate risk because designation of an
investment as held-to-maturity involves not accounting for associated changes in interest
rates. However, a held-to-maturity investment can be a hedged item with respect to
risks from changes in foreign currency exchange rates and credit risk (paragraph 127) |
If a hedged item is all or a portion of a debt security (or a portfolio of similar debt securities) that is classified as held-to-maturity in accordance with FASB Statement No. 115, the designated risk being hedged is the risk of changes in its fair value attributable to changes in the obligor's creditworthiness or if the hedged item is an option component of a held-to-maturity security that permits its prepayment, the designated risk being hedged is the risk of changes in the entire fair value of that option component. If the hedged item is other than an option component that permits its prepayment, the designated hedged risk also may not be the risk of changes in its overall fair value (paragraph 21d) |
| 4. Designated Risks for Financial Asset or Liability |
If a hedged item is a financial asset or liability, it may be a hedged
item with respect to the risks associated with only a portion of its cash flows or fair
value, if effectiveness can be measured (paragraph 128) |
If the hedged item is a financial asset or liability, a recognized loan
servicing right, or a nonfinancial firm commitment with financial components, the
designated risk being hedged is (1) the risk of changes in the overall fair value of the
entire hedged item, (2) the risk of changes in its fair value attributable to changes in
market interest rates, (3) the risk of changes in its fair value attributable to changes
in the related foreign currency exchange rates (refer to paragraphs 37 & 38), or (4)
the risk of changes in its fair value attributable to changes in the obligor's
creditworthiness. If the designated hedged risk is not the risk in (1) above, 2 or more of the other risks may simultaneously be designated as being hedged. An entity may not simply designate prepayment risk as the risk being hedged for a financial asset. However, it can designate the option component of a prepayable instrument as the hedged item in a fair value hedge of the entity's exposure to changes in the fair value of that 'prepayment option'. The effect of an embedded derivative of the same risk class must be considered in designating a hedge of an individual risk -- i.e., in designating a hedge of market interest rate risk (paragraph 21f) |
| 5. Designated Risks for Non-Financial Asset or Liability |
If a hedged item is a non-financial asset or liability, it should be
designated as a hedged item either (a) for foreign currency risks or (b) in its entirety
for all risks (paragraph 129) |
If the hedged item is a non-financial asset or liability (other than a
recognized loan servicing right or a nonfinancial firm commitment with financial
components), the designated risk being hedged is the risk of changes in the fair value of
the entire hedged asset or liability (reflecting its actual location if a physical asset).
The price risk of a similar asset in a different location or of a major ingredient
may not be the hedged risk. (paragraph 21e) |
| 6. Single Hedging Instruments against Multiple Risks |
A single hedging instrument may be designated as a hedge of more than one
type of risk provided that: (a) the risks hedged can be clearly identified, (b) the
effectiveness of the hedge can be demonstrated, and (c) it is possible to ensure that
there is a specific designation of the hedging instrument and the different risk positions (paragraph 131) |
If the risk designated as being hedged is not the risk of changes in
overall fair value of the entire hedged item, two or more of the other risks (market
interest rate risk, foreign currency exchange risk, and credit risk) may simultaneously be
designated as being hedged (paragraph 21(f)) |
| 7. Sharing of Similar Risk Exposure in a Group of Assets or
Liabilities |
If similar assets or similar liabilities are aggregated and hedged as a
group, the individual assets or individual liabilities in the group will share the risk
exposure for which they are designated as being hedged. Further, the change in fair
value attributable to the hedged risk for each individual item in the group will be
expected to be approximately proportional to the overall change in fair value attributable
to the hedged risk of the group (paragraph 132) |
Same as IAS 39. Example: if the change in fair value of a hedged portfolio attributable to the hedged risk was 10% during a reporting period, the change in the fair values attributable to the hedged risk for each item constituting the portfolio should be expected to be within a range of 9-11%. In contrast, an expectation that the change in fair value attributable to the hedged risk for individual items in the portfolio would range from 7-13% would be inconsistent with this provision. (paragraph 21a(1)) |
| 8. Examples of Permissible and Non-Permissible Hedged Items |
A firm commitment to acquire a business in a business combination cannot
be a hedged item except with respect to foreign exchange risk. It is a hedge of a
general business risk. (paragraph 135) The following cannot be a hedged item in a fair value hedge: (1) an equity method investment, (2) an investment in a consolidated subsidiary whereas a hedge of a net investment in a foreign subsidiary is a hedge of the foreign currency exposure (paragraph 150) |
If the hedged item is a specific portion of an asset/liability (or of a
portfolio of similar assets/liabilities), the hedged item is one of the following: (1) A percentage of the entire asset/liability (2) One or more selected contractual cash flows (3) A put option, a call option, an interest rate cap, or an interest rate floor embedded in an existing asset/liability that is not an embedded derivative accounted for separately pursuant to paragraph 12 of the Statement (4) The residual value in a lessor's net investment in a direct financing or sales-type lease If the entire asset/liability is an instrument with variable cash flows, the hedged item cannot be deemed to be an implicit fixed-to-variable swap perceived to be embedded in a host contract with fixed cash flows. (paragraph 21a(2)) The hedged item is not: (1) an asset or liability that is remeasured with the changes in fair value attributable to the hedged risk reported currently in earnings (for example, if foreign exchange risk is hedged, a foreign-currency-denominated asset for which a foreign currency transaction gain or loss is recognized in earnings), (paragraph 21c(1)) (Likewise, paragraph 29d prohibits the following transaction from being designated as the hedged forecasted transaction in a cash flow hedge: the acquisition of an asset or incurrence of a liability that will subsequently be remeasured with changes in fair value attributable to the hedged risk reported currently in earnings. If the forecasted transaction relates to a recognized asset or liability, the asset or liability is not remeasured with changes in fair value attributable to the hedged risk reported currently in earnings.) (2) an investment accounted for by the equity method in accordance with the requirements of APB Opinion No. 18 (3) a minority interest in one or more consolidated subsidiaries (4) an equity instrument in a consolidated subsidiary (5) a firm commitment either to enter into a business combination or to acquire or dispose of a subsidiary, a minority interest or an equity method investee or (6) an equity instrument issued by the entity and classified in stockholders' equity in the statement of financial position (paragraph 21c) The following cannot be designated as a hedged item in a foreign currency hedge: (a) a recognized asset or liability that may give rise to a foreign currency transaction gain or loss under Statement 52 (such as a foreign-currency-denominated receivable or payable) either in a fair value hedge or a cash flow hedge; (b) the forecasted acquisition of an asset or the incurrence of a liability that may give rise to a foreign currency transaction gain or loss under Statement 52 in a cash flow hedge (paragraph 36) An available-for-sale equity security can be hedged for changes in the fair value attributable to changes in foreign currency exchange rates if: (a) the security is not traded on an exchange on which trades are denominated in the investor's functional currency; (b) dividends or other cash flows to holders of the security are all denominated in the same foreign currency as the currency expected to be received upon sale of the security (paragraph 38) |
| Hedge Effectiveness | ||
| 1. Definition of Effectiveness |
A hedge is normally regarded as highly effective if, at inception and
throughout the life of the hedge, the enterprise can expect changes in the fair value or
cash flows of the hedged item to be almost fully offset by the changes in the fair value
or cash flows of the hedging instrument, and actual results are within a range of 80-125% (paragraph 146) |
This Statement requires that an entity define at the time it designates a
hedging relationship the method it will use to assess the hedge's effectiveness in
achieving offsetting changes in fair value or offsetting cash flows attributable to the
risk being hedged (paragraph 62) In defining how hedge effectiveness will be assessed, an entity must specify whether it will include in that assessment all of the gain or loss on a hedging instrument. The Statement permits (but does not require) an entity to exclude all or a part of the hedging instrument's time value from the assessment of hedge effectiveness. (paragraph 63) |
| 2. Consistent Application |
The method an enterprise adopts for assessing hedge effectiveness will
depend on its risk management strategy. In some cases, an enterprise will adopt
different methods for different types of hedges. For instance, an interest rate swap
is likely to be an effective hedge if the notional and principal amounts, term, repricing
dates, dates of interest and principal receipts and payments, and basis for measuring
interest rates are the same for the hedging instrument and the hedge item. (paragraph 147) The hedge must relate to a specific identified and designated risk, and not merely to overall enterprise business risks, and must ultimately affect the enterprise's net profit or loss (paragraph 149) |
It also requires that an entity use that defined method consistently
throughout the hedge period (a) to assess at inception of the hedge and on an ongoing
basis whether it expects the hedging relationship to be highly effective in achieving
offset and (b) to measure the ineffective part of the hedge (paragraph 62) If the entity identifies an improved method and wants to apply that method prospectively, it must discontinue the existing hedging relationship and designate the relationship anew (paragraph 62) The appropriateness of a given method of assessing hedge effectiveness can depend on the nature of the risk being hedged and the type of hedging instrument used. Ordinarily, however, an entity should assess effectiveness for similar hedges in a similar manner, use of different methods for similar hedges should be justified. |
| 3. Sources of Ineffectiveness |
Sometimes the hedging instrument will offset the hedged risk only
partially. For instance, a hedge would not be fully effective if the hedging
instrument and hedged item are denominated in different currencies and the two do not move
in tandem. (paragraph 148) |
Hedge ineffectiveness would result from the following circumstances, among
others: a) difference between the basis of the hedging instrument and the hedged item or hedged transaction, to the extent that those bases do not move in tandem b) differences in critical terms of the hedging instrument and hedged item or hedged transaction, such as differences in notional amounts, maturities, quantity, location, or delivery dates c) part of the change in the fair value of a derivative is attributable to a change in the counterparty's creditworthiness (paragraph 66) |
| 4. Method of Assessment |
This Standard does not specify a single method for assessing hedge
effectiveness. An enterprise's documentation of its hedging strategy will include
its procedures for assessing effectiveness. Those procedures will state whether the
assessment will include all of the gain/loss on a hedging instrument or whether the
instrument's time value will be excluded. Effectiveness is assessed, at a minimum,
at the time an enterprise prepares its annual or interim financial report. (paragraph 151) |
This Statement does not specify a single method for either assessing
whether a hedge is expected to be highly effective or measuring hedge ineffectiveness.
The appropriateness of a given method can depend on the nature of the risk being
hedged and the type of hedging instrument used. (Appendix A, paragraph 62) |
| 5. Time-Value of Money |
In assessing the effectiveness of a hedge, an enterprise will generally
need to consider the time value of money. (paragraph 152) |
Same as IAS 39. This is especially important if the hedging instrument involves periodic cash settlements. (See paragraph 64 for further example) |
| 6. Short-Cut Method |
If the critical terms of the hedging instrument and the entire hedged
asset/liability or hedged forecasted transaction are the same, an enterprise could
conclude that changes in fair value or cash flows attributable to the risk being hedged
are expected to completely offset at inception and on an ongoing basis. For example, an entity may assume that a hedge of a forecasted purchase of a commodity with a forward contract will be highly effective and that there will be no ineffectiveness to be recognized in net profit or loss if: (a) the forward contract is for purchase of the same quantity of the same commodity at the same time and location as the hedged forecasted purchase; (b) the fair value of the forward contract at inception is zero; and (c) either the change in the discount or premium on the forward contract is excluded from the assessment of effectiveness and included directly in net profit or loss or the change in expected cash flows on the forecasted transaction is based on the forward price for the commodity (paragraph 151) |
Same as IAS 39 (paragraph 65) See paragraph 68 for the exact conditions that have to be met if an entity is to assume no ineffectiveness in a hedging relationship of interest rate risk involving an interest-bearing asset/liability and an interest rate swap |
| 7. Different Indices |
The fixed rate on a hedged item need not exactly match the fixed rate on a
swap designated as a fair value hedge. Nor does the variable rate on an
interest-bearing asset or liability need to be the same as the variable rate on a swap
designated as a cash flow hedge. A swap's fair value comes from its net settlements.
The fixed and variable rates on a swap can be changed without affecting the net
settlement if both are changed by the same amount. (paragraph 152) |
Same as IAS 39 (See paragraph 69 for further example) |
| 8. Miscellaneous |
Comparable credit risk at inception is not a condition for assuming no
ineffectiveness (paragraph 70) In defining how hedge effectiveness will be assessed, an entity must specify whether it will include in that assessment all of the gain or loss on a hedging instrument. This Statement permits an entity to exclude all/part of the hedging instrument's time value from the assessment of hedge effectiveness, as follows: a) If the effectiveness of a hedge with an option contract is assessed based on changes in the option's intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness b) If the effectiveness of a hedge with an option contract is assessed based on changes in the option's minimum value, that is, its intrinsic value plus the effect of discounting, the change in the volatility value of the contract would be excluded from the assessment of hedge effectiveness c) If the effectiveness of a hedge with a forward or futures contract is assessed based on changes in fair value attributable to changes in spot prices, the change in the fair value of the contract related to the changes in the difference between the spot price and the forward or futures price would be excluded from the assessment of hedge effectiveness In each circumstance above, changes in the excluded component would be included currently in earnings, together with any ineffectiveness that results under the defined method of assessing ineffectiveness (paragraph 63) See further paragraphs 73-103 for illustrations of assessing effectiveness and measuring ineffectiveness: Example 1: Fair Value Hedge of Natural Gas Inventory with Futures Contracts (paragraphs 73-77) Example 2: Fair Value Hedge of Tire Inventory with a Forward Contract (paragraphs 78-80) Example 3: Fair Value Hedge of Growing Wheat with Futures Contracts (paragraphs 81-84) Example 4: Fair Value Hedge of Equity Securities with Option Contracts (paragraphs 85-87) Example 5: Fair Value Hedge of a Treasury Bond with a Put Option Contract (paragraphs 88-90) Example 6: Fair Value Hedge of an Embedded Purchased Option with a Written Option (paragraphs 91-92) Example 7: Cash Flow Hedge of a Forecasted Purchase of Inventory with a Forward Contract (paragraphs 93-97) Example 8: Cash Flow Hedge with a Basis Swap (paragraphs 98-99) Example 9: Cash Flow Hedge of Forecasted Sale with a Forward Contract (paragraphs 100-101) Example 10: Attempted Hedge of a Forecasted Sale with a Written Call Option (paragraphs 102-103) |
|
| C2. Qualifying Conditions for Hedge Accounting | ||
| 1. Fair Value Hedge |
1. At the inception of the hedge there is formal documentation of the
hedging relationship and the enterprise's risk management objective and strategy for
undertaking the hedge. That documentation should include identification of the
hedging instrument, the related hedged item or transaction, the nature of the risk being
hedged, and how the enterprise will assess the hedging instrument's effectiveness in
offsetting the exposure to changes in the hedged item's fair value that is attributable to
the hedged risk. (paragraph 142a) 2. The hedge is expected to be highly effective (see paragraph 146) in achieving offsetting changes in fair value attributable to the hedged risk, consistent with the originally documented risk management strategy for that particular hedging relationship (paragraph 142b) 3. The effectiveness of the hedge can be reliably measured (see paragraph 95 for guidance on fair value) (paragraph 142d) 4. The hedge was assessed on an ongoing basis and determined actually to have been highly effective throughout the financial reporting period (paragraph 142e) |
1. Same as IAS 39 (See point 1 in left column). In addition,
there must be a reasonable basis for how the entity plans to assess the hedging
instrument's effectiveness. For a fair value hedge of a firm commitment, the entity's formal documentation at the inception of the hedge must include a reasonable method for recognizing in earnings the asset or liability representing the gain or loss on the hedged firm commitment An entity's defined risk management strategy for a particular hedging relationship may exclude certain components of a specific hedging derivative's change in fair value as discussed in paragraph 63 of Appendix A (paragraph 20a) 2. Same as IAS 39 (See point 2 in left column). In addition, an assessment of effectiveness is required whenever financial statements or earnings are reported, and at least every three months. If the hedging instrument provides only one-sided offset of the hedged risk, the increases in the fair value of the hedging instrument must be expected to be highly effective in offsetting the decreases in the fair value of the hedged item (paragraph 20b) 3. If a written option is designated as hedging a recognized asset or liability, the combination of the hedged item and the written option provides at least as much potential for gains as a result of a favorable change in the fair value of the combined instruments as exposure to losses from an unfavorable change in their combined fair value (see paragraph 20c for test details) Further, the criteria in paragraph 21 must also be met (paragraph 20) |
| 2. Cash Flow Hedge |
Same as above except that the reference here is to cash flows and that for
a cash flow hedge, a forecasted transaction that is the subject of the hedge must be
highly probable and must present an exposure to variations in cash flows that could
ultimately affect reported net profit or loss (paragraph 142(c)) (paragraph 142) |
Same as 1 above. In addition, an entity's defined risk management
strategy for a particular hedging relationship may exclude certain components of a
specific hedging derivative's change in fair value from the assessment of hedge
effectiveness, as discussed in paragraph 63 of Appendix A. Documentation shall include all relevant details, including the date on or period within which the forecasted transaction is expected to occur, the specific nature of asset or liability involved, and the expected currency amount or quantity of the forecasted transaction See further paragraph 28a(2) (a) & (b) for the definition of 'expected currency amount' and 'expected...quantity' respectively (paragraph 28a) The hedged forecasted transaction shall be described with sufficient specificity so that when a transaction occurs, it is clear whether that transaction is or is not the hedged transaction (paragraph 28a) Same as point 2 in right column above except that the reference here is to cash inflows and outflows (paragraph 28b) Same as point 3 in right column above except that the reference here is to cash flows (paragraph 28c) If a hedging instrument is used to modify the interest receipts or payments associated with a recognized financial asset or liability from one variable rate to another, the hedging instrument must be a link between an existing designated asset and liability (both with variable cash flows) and be highly effective at achieving offsetting cash flows. See further paragraph 28d for definition of link. |
| 3. Foreign Currency Hedge |
Similar to Cash Flow Hedges except for the limited circumstances in which
the hedging instrument is not a derivative in accordance with paragraph 19 of IAS 21 (paragraph 142 and 164(bii)) |
Foreign Currency Fair Value Hedges - have to satisfy the fair value hedge
criteria in paragraphs 20 & 21 (paragraphs 37 and 38) Foreign Currency Cash Flow Hedges qualify for hedge accounting if a) the operating unit that has the foreign currency exposure is a party to the hedging instrument b) the hedged transaction is denominated in a currency other than that unit's functional currency c) all of the criteria in paragraphs 28 & 29 are met, except for the criterion in paragraph 29(c) that requires that the forecasted transaction be with a party external to the reporting entity d) if the hedged transaction is a group of individual forecasted foreign-currency-denominated transactions, a forecasted inflow of a foreign currency and a forecasted outflow of the foreign currency cannot both be included in the same group (paragraph 40) |
| C3. Method of Accounting | ||
| 1. Fair Value Hedge |
a) The gain or loss from remeasuring the hedging instrument at fair value
should be recognized immediately in earnings; and b) The gain or loss on the hedged item attributable to the hedged risk should adjust the carrying amount of the hedged item and be recognized immediately in earnings. c) This applies even if a hedged item is otherwise measured at fair value with changes in fair value recognized directly in equity under paragraph 103b. It also applies if the hedged item is otherwise measured at cost. (paragraph 153) See paragraph 154 for example. |
Same as IAS 39 (See right column points a and b) except that any
classification in equity is specifically placed in Other Comprehensive Income If the fair value hedge is fully effective, the gain or loss on the hedging instrument adjusted for the component, if any, of that gain or loss that is excluded from the assessment of effectiveness under the entity's defined risk management strategy for that particular hedging relationship (as discussed in paragraph 63 in Section 2 of Appendix A), would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the effect of hedge ineffectiveness, which consequently is recognized currently in earnings. (paragraph 22) |
| 2. Cash Flow Hedge |
The portion of the gain or loss on the hedging instrument that is
determined to be an effective hedge (see paragraph 142) should be recognized directly in
equity through the statement of changes in equity (see IAS 1, paragraphs 86-88); and the
ineffective portion should be reported immediately in net profit or loss if the hedging
instrument is a derivative; or in accordance with paragraph 103 in the limited circumstances in which the hedging instrument is not a derivative (paragraph 158) More specifically, (a) the separate component of equity associated with the hedged item is adjusted to the lesser of the following (in absolute amounts): (i) the cumulative gain/loss on the hedging instrument necessary to offset the cumulative change in expected future cash flows on the hedged item from inception of the hedge excluding the ineffective component discussed in paragraph 158(b); and (ii) the fair value of the cumulative change in expected future cash flows on the hedged item from inception of the hedge; (b) any remaining gain/loss on the hedging instrument (which is not an effective hedge) is included in net profit or loss or directly in equity as appropriate under paragraphs 103 and 158; and (c) if an enterprise's documented risk management strategy for a particular hedging relationship excludes a specific component of the gain or loss or related cash flows on the hedging instrument from the assessment of hedge effectiveness (see paragraph 142(a)) that excluded component of gain or loss is recognized in accordance with paragraph 103 (paragraph 159) |
Similar to IAS 39 except that any classification in equity is specifically
placed in Other Comprehensive Income If an entity's defined risk management risk strategy for a particular hedging relationship excludes a specific component of the gain or loss, or related cash flows, on the hedging derivative from the assessment of hedge effectiveness (see paragraph 63), that excluded component of the gain or loss shall be recognized currently in earnings (paragraph 30a) Accumulated other comprehensive income associated with the hedged transaction shall be adjusted to a balance that reflects the lesser of the following (in absolute amounts): (1) the cumulative gain or loss on the derivative from inception of the hedge less (a) the excluded component discussed in paragraph 30a and (b) the derivative's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraph 31 (2) the portion of the cumulative gain or loss on the derivative necessary to offset the cumulative change in expected future cash flows on the hedged transaction from inception of the hedge less the derivative's gains or losses previously reclassified from accumulated other comprehensive income into earnings pursuant to paragraph 31 That adjustment of accumulated other comprehensive income shall incorporate recognition in other comprehensive income of part or all of the gain or loss on the hedging derivative, as necessary A gain or loss shall be recognized in earnings, as necessary, for any remaining gain or loss on the hedging derivative or to adjust other comprehensive income to the balance specified in paragraph 30(b) (paragraph 30) |
| 3. Foreign Currency Hedge |
Should be accounted for similarly to Cash Flow Hedges: (a) the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge (see paragraph 142) should be recognized directly in equity through the statement of changes in equity (see IAS1, paragraphs 86-88); and (b) the ineffective portion should be reported: 1) immediately in earnings if the hedging instrument is a derivative; or (2) in accordance with paragraph 19 of IAS 21, in the limited circumstances in which the hedging instrument is not a derivative The gain or loss on the hedging instrument relating to the effective portion of the hedge should be classified in the same manner as the foreign currency translation gain or loss (paragraph 164) |
Foreign Currency Fair Value Hedges: Gains and losses on a qualifying
foreign currency fair value hedge shall be accounted for as specified in paragraphs 22-27. The gain or loss on a nonderivative hedging instrument attributable to foreign currency risk is the foreign currency transaction gain or loss as determined under Statement 52 (see paragraph 15 of Statement 52). That foreign currency transaction gain or loss shall be recognized currently in earnings along with the change in the carrying amount of the hedged firm commitment. (paragraph 39) Foreign Currency Cash Flow Hedges: shall be accounted for as specified in paragraphs 30-35 (paragraph 41) Hedges of the Foreign Currency Exposure of a Net Investment in a Foreign Operation: The hedged net investment shall be accounted for consistent with Statement 52; the provisions of this Statement for recognizing the gain or loss on assets designated as being hedged in a fair value hedge do not apply to the hedge of a net investment in a foreign operation (paragraph 42) |
| Description | IAS 39 | FAS 133 |
| Hedge Objective |
Financial statements should include all of the disclosures required by IAS
32, except that the requirements in IAS 32 for supplementary disclosure of fair values
(paragraphs 77 and 88) are not applicable to those financial assets and financial
liabilities carried at fair value (paragraph 166) The following should be included in the disclosures of the enterprise's accounting policies as part of the disclosure required by IAS 32 paragraph 47(b): 1) the methods and significant assumptions applied in estimating fair values of financial assets and financial liabilities that are carried at fair value, separately for significant classes of financial assets (see paragraph 46, IAS 32) 2) whether gains and losses arising from changes in the fair value of those available-for-sale financial assets that are measured at fair value subsequent to initial recognition are included in net profit or loss for the period or are recognized directly in equity until the financial asset is disposed of; and 3) for each of the four categories of financial assets defined in paragraph 10, whether 'regular way' purchases of financial assets are accounted for at trade date or settlement date (see paragraph 30) (paragraph 167) In applying the above paragraph, an enterprise will disclose prepayment rates, rtes of estimated credit losses, and interest or discount rates (paragraph 168) |
An entity that holds or issues derivative instruments (or nonderivative
instruments that are designated and qualify as hedging instruments pursuant to paragraphs
37 and 42) shall disclose its objectives for holding or issuing those instruments, the
context needed to understand those objectives, and its strategies for achieving those
objectives The description shall distinguish between derivative instruments (and nonderivative instruments) designated as fair value hedging instruments, derivative instruments designated as cash flow hedging instruments, derivative (and nonderivative) instruments designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation, and all other derivatives (paragraph 44) |
| Hedge Accounting |
Financial statements should include all of the following additional disclosures relating to hedge accounting: | |
| 1) describe the enterprise's financial risk management objectives and
policies, including its policy for hedging each major type of forecasted transaction (see
paragraph 142(a) for example); 2) disclose the following separately for designated fair value hedges, cash flow hedges and hedges of a net investment in a foreign entity: (a) a description of the hedge: (b) a description of the financial instruments designated as hedging instruments for the hedge and their fair values at the balance sheet date; (b) the nature of the risks being hedged; and (d) for hedges of forecasted transactions, the periods in which the forecasted transactions are expected to occur, when they are expected to enter into the determination of net profit or loss, and a description of any forecasted transaction for which hedge accounting had previously been used but that is no longer expected to occur; and 3) if a gain or loss on derivative and non-derivative financial assets and liabilities designated as hedging instruments in cash flow hedges has been recognized directly in equity, through the statement of changes in equity disclose: (a) the amount that was so recognized in equity during the current period; (b) the amount that was removed from equity and reported in net profit or loss for the period; and (c) the amount that was removed from equity and added to the initial measurement of the acquisition cost or other carrying amount of the asset/liability in a hedged forecasted transaction during the current period (see paragraph 160) (paragraph 169) |
Fair Value Hedges: For derivative instruments and nonderivative
instruments that may give rise to foreign currency transaction gains or losses under
Statement 52, that have been designated and have qualified as fair value hedging
instruments and for the related hedged items: 1) The net gain or loss recognized in earnings during the reporting period representing (a) the amount of the hedges' ineffectiveness and (b) the component of the derivative instruments' gain or loss, if any, excluded from the assessment of hedge effectiveness, and a description of where the net gain or loss is reported in the statement of income or other statement of financial performance 2) The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge (paragraph 45a) Cash flow hedges: For derivative instruments that have been designated and have qualified as cash flow hedging instruments and for the related hedged transactions: 1) Same as 1) above. 2) A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income, and the estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next 12 months 3) The maximum length of time over which the entity is hedging its exposure to the variability in future cash flows for forecasted transactions excluding those forecasted transactions related to the payment of variable interest on existing financial instruments 4) The amount of gains and losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it is probable that the original forecasted transaction will not occur (paragraph 45b) Hedges of the net investment in a foreign operation: For derivative instruments and nonderivative instruments that may give rise to foreign currency transaction gains/losses under Statement 52, that have been designated and have qualified as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation, the net amount of gains/losses included in the cumulative translation adjustment during the reporting period (paragraph 45c) |
|
| Description | IAS 39 | FAS 133 |
| E1. Effective Date | ||
| Effective Date |
It becomes operative for financial statements covering financial years
beginning on or after 1 January 2001. Earlier application is permitted only as of
the beginning of a financial year that ends after 15 March 1999. Retrospective
application is not permitted. (paragraph 171) |
This Statement shall be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. Initial application of this Statement shall be
as of the beginning of an entity's fiscal quarter. Earlier application of all of the
provisions of this Statement is encouraged but is permitted only as of the beginning of
any fiscal quarter that begins after issuance of this Statement. Earlier application
of selected provisions of this Statement is not permitted. (paragraph 48, as amended by FAS 137) |
| E2. Transition | ||
| Retroactive Application |
Recognition, derecognition, measurement and hedge accounting policies
followed in financial statements for periods prior to the effective date of this Standard
should not be reversed and, therefore, those financial statements should not be restated (paragraph 172(a)) Transactions entered into before the beginning of the financial year in which this Standard is initially applied should not be retrospectively designated as hedges (paragraph 172(g)) If a securitization, transfer, or other derecognition transaction was entered into prior to the beginning of the financial year in which this Standard is initially applied, the accounting for that transaction should not be retrospectively changed to conform to the requirements of this Standard (paragraph 172(h)) |
This Statement shall not be applied retroactively to financial statements
of prior periods (paragraph 48) The accounting for any gains and losses on derivative instruments that arose prior to the initial application of the Statement and that were previously added to the carrying amount of recognized hedged assets or liabilities is not affected by this Statement. Those gains and losses shall not be included in the transition adjustment (paragraph 49) |
| Prospective Application |
For those transactions entered into before the beginning of the financial
year in which this Standard is initially applied that the enterprise did previously
designate as hedges, the recognition, derecognition, and measurement provisions of this
Standard should be applied prospectively (paragraph 172(b)) If an enterprise's hedge accounting policies prior to initial application of this Standard had included deferral, as assets and liabilities, of gains or losses on cash flow hedges, at the beginning of the financial year in which this Standard is initially applied, those deferred gains and losses should be reclassified as a separate component of equity to the extent that the transactions meet the criteria in paragraph 142, and, thereafter, accounted for as set out in paragraphs 160-162 (paragraph 172(f)) |
On the date of the Statement's applicability, hedging relationships shall
be designated anew and documented pursuant to the provisions of this Statement (paragraph 48) |
| Restatement of Derivatives |
At the beginning of the financial year in which this Standard is initially
applied, an enterprise should recognize all derivatives in its balance sheet as either
assets or liabilities and should measure them at fair value (except for a derivative that
is linked to and that must be settled by delivery of an unquoted entity instrument whose
fair value cannot be measured reliably) (paragraph 172(c)) |
At the date of initial application, an entity shall recognize all
freestanding derivative instruments (as opposed to embedded derivatives) in the statement
of financial position as either assets or liabilities and measure them at fair value
pursuant to paragraph 17. The difference between a derivative's previous carrying
amount and its fair value shall be reported as a transition adjustment, as discussed in
paragraph 52. The entity also shall recognize offsetting gains and losses on hedged
assets, liabilities, and firm commitments by adjusting their carrying amounts at that
date, as discussed in paragraph 52(b). (paragraph 49) See paragraphs 50 and 51 for adjustments relating to separating an embedded derivative instrument separated from its host contract in conjunction with the initial application of this Statement Any gains or losses on derivative instruments reported in other comprehensive income at the date of initial application because the derivative instruments were hedging the fair value exposure of available-for-sale securities also shall be reported as transition adjustments; the offsetting losses and gains on the securities shall be accounted pursuant to paragraph 52(b) (paragraph 49) In contrast, the derivative instrument hedging the variable cash flow exposure of a forecasted transaction related to an available-for-sale security shall remain in accumulated other comprehensive income and shall not be reported as a transition adjustment (paragraph 49) If a derivative instrument had been hedging the variable cash flow exposure of a forecasted transaction related to an available-for-sale security that is transferred into the trading category at the date of initial application and the entity had reported a gain or loss on that derivative instrument in other comprehensive income (consistent with paragraph 115 of Statement 115), the entity also shall reclassify those derivative gains and losses into earnings (but not report them as part of the cumulative-effect-type adjustment for the transition adjustments (paragraph 55) |
| Restatement of Other Financial Assets or Liabilities |
At the beginning of the financial year in which this Standard is initially
applied, an enterprise should apply the criteria in paragraphs 66-102 to identify those
financial assets and liabilities that should be measured at fair value and those that
should be measured at amortized cost, and it should remeasure those assets as appropriate (paragraph 172(d)) Any adjustment of the previous carrying amount should be recognized as an adjustment of the balance of retained earnings at the beginning of the financial year in which this Standard is initially applied (paragraph 172(d)) |
The unrealized holding gain or loss on a held-to-maturity security
transferred to another category at the date of initial application shall be reported in
net income or accumulated other comprehensive income consistent with the requirements of
paragraphs 15(b) and 15(c) of Statement 115 and reported with the other transition
adjustments discussed in paragraph 52 of this Statement (paragraph 54) |
| Transition Adjustment |
At the beginning of the financial year in which this Standard is initially
applied, any balance sheet positions in fair value hedges of existing assets and
liabilities should be accounted for by adjusting their carrying amounts to reflect the
fair value of the hedging instrument (paragraph 172(e)) At the beginning of the financial year in which this Standard is initially applied, an enterprise should classify a financial instrument as equity or as a liability in accordance with paragraph 11 of this Standard (paragraph 172(i)) |
Any gains or losses on derivative instruments that are reported
independently as deferred gains or losses in the statement of financial position at the
date of initial application shall be derecognized from that statement; that derecognition
also shall be reported as transition adjustment as indicated in paragraph 52 (paragraph 49) The transition adjustment for the derivative instrument that had been designated in a hedging relationship that addressed the fair value exposure of an asset, a liability, or a firm commitment shall be reported as a cumulative-effect-type adjustment of net income Concurrently, any difference between the hedged item's fair value and its carrying amount shall be recognized as an adjustment of the hedged item's carrying amount at the date of initial application, but only to the extent of an offsetting transition adjustment for the derivative. The adjustment of the hedged item's carrying amount shall also be reported as a cumulative-effect-type adjustment of net income The transition adjustment related to the gain or loss reported in accumulated other comprehensive income on a derivative instrument that hedged an available-for-sale security, together with the loss or gain on the related security (to the extent of an offsetting transition adjustment for the derivative instrument), shall be reclassified to earnings as a cumulative-effect-type adjustment of both net income and accumulated other comprehensive income (paragraph 52b) See paragraphs 52a and 52c for how the transition adjustment relating to (1) a derivative instrument that had been designated in a hedging relationship that addressed the variable cash flow exposure of a forecasted transaction and (2) a derivative instrument that had been designated in multiple hedging relationships that addressed both the fair value exposure of an asset or a liability and the variable cash flow exposure of a forecasted transaction respectively should be reported Other transition adjustments not encompassed by paragraphs 52(a), 52(b) and 52(c) shall be reported as part of the cumulative-effect-type adjustment of net income (paragraph 52(d)) Note that any transition adjustment reported as a cumulative-effect-type adjustment of accumulated other comprehensive income shall be subsequently reclassified into earnings in a manner consistent with paragraph 31 (paragraph 53) |
| Miscellaneous |
At the date of initial application, mortgage bankers and other servicers
of financial assets may choose to restratify their servicing rights pursuant to paragraph
37(g) of Statement 125 in a manner that would enable individual strata to comply with the
requirements of this Statement regarding what constitutes "a portfolio of similar
assets". The restratification of servicing rights is a change in the
application of an accounting principle, and the effect of that change as of the initial
application of this Statement shall be reported as part of the cumulative-effect-type
adjustments for the transition adjustments (paragraph 56) |
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