The lights went off in much of Norwalk, CT. yesterday morning and power was not restored to the FASB headquarters until the early afternoon. Yet the DIG managed to not only carry through its agenda, but with unusual swiftness. It contemplated the full list of issues before 4:00PM, cancelled the second-day ’s (Oct. 22) meeting and even had time to consider three draft FASB Staff write-ups on the critical issues of net investment hedging and effectiveness that had been pending since June.

Highlights
Key effectiveness issues (net investment and dollar offset) from June made a surprise come-back in the form of a draft Staff draft write-up, bringing them a step closer to becoming a DIG tentative conclusion. In essence, the draft conclusions accurately reflect the DIG’s breakthrough thinking in June, and will provide companies with much needed simplicity and a good chance to be completely effectiveness in net investment hedges as long as the hedge matches the investment (even when using a cross-currency, floating-to-floating swap!).

The DIG concluded that in measuring hedge effectiveness in swaps that do not qualify for the shortcut, all three alternative views (offered in the agenda), would be allowed.

The three views represent basically two approaches:

(1) the entire fair value of the hedge is taking into consideration when measuring effectiveness in this cash flow hedge; or

(2) the fixed-rate leg of the swap is ignored and the floating-to-floating cash flows are measured for offset.

The Staff provided a write up of item 7-7 (from the Sept. 9 meeting) related to swaps that would have qualified for the shortcut prior to adopting FAS 133. The Staff’s re-write of the original resolution would basically allow companies, at transition the option to make cumulative catch-up adjustments as if the swap had been under the shortcut method all along (for both cash flow and fair value hedges).

DIG Chairman (and FASB Board member) Jim Leisenring indicated the Board is getting ready to consider possible FAS 133 amendments by end the end of November or very early December. The emphasis of the first discussion, he said, will be on changes that might facilitate transition.

The DIG failed to resolve, for the second times, some fundamental issues related to how to allocate cash flows from a hybrid instrument (non-derivative host). Some of these issues are going back to the drawing board - yet again - revealing two basic issues related to consistency within FAS 133:

(1) that companies might be able to utilize embedded derivatives in non-financial hosts to skirt FAS 133; and

(2) that embedded derivatives would end up being accounted for differently than a comparable freestanding instrument.