Exhibit 4-1
Application of FAS 133 to Common Hedge Transactions
Derivative Hedging Instrument with Hedged Item |
Purpose of the Hedge Transaction |
Type of Hedge-- Fair Value (FV) or Cash Flow (CF) |
Accounting for the Derivative Hedging Instrument |
Accounting for the Derivative Hedged Item |
Futures Contract with Commodity inventory |
To protect against a decline in the fair value of the commodity inventory. | FV | All gains and losses on the derivative are recorded in earnings. | Gains and losses on the entire hedged item are recorded in earnings. |
Futures contract with Firm commitment |
To protect against a change in the fair value of the firm commitment. | FV | All gains and losses on the derivative are recorded in earnings. | Gains and losses on the entire hedged item are recorded in earnings. |
Futures contract with Anticipated sale of inventory at current market prices |
To protect against fluctuations in market prices of the item to be sold. | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Receive fixed, pay variable interest-rate
swap with Nonprepayable fixed-rate debt (liability) |
To protect against an increase in the fair value of the debt due to declining interest rates (stated differently, to convert the debt's fixed rate to a variable rate). | FV | All gains and losses on the derivative are recorded in earnings. | Gains and losses on the hedged item that are attributable to interest rate risk are recorded in earnings. |
Receive variable, pay fixed interest-rate
swap with Variable-rate debt |
To protect against an increase in interest rates (stated differently, to convert the debt's variable rate to a fixed rate). | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Floor contract with Variable-rate assets |
To protect against declines in cash flows of variable-rate assets. | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Commodity swap with Anticipated sales of commodity at market prices |
To protect against declines in cash flows caused by declines in market prices of the commodity. | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Basis swap with Variable-rate assets and liabilities | To "lock in" or preserve a spread between variable interest-earning assets and variable interest-bearing liabilities. | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Purchased call or put option with Anticipated purchases or sales of inventory at market prices | To protect against variability in cash flows caused by variability in market prices of the inventory. | CF | Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedge item. |
Purchased call or put option with Anticipated purchases or sales denominated in a foreign currency | To protect against changes in cash flows caused by changes in foreign-currency exchange rates. | CF-- foreign currency |
Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Range forward contract with Anticipated payment denominated in a foreign currency | To protect against changes in cash outflows caused by changes in foreign-currency exchange rates outside a particular range. | CF-- foreign currency |
Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Forward exchange contract with Anticipated payment denominated in a foreign currency | To protect against changes in cash outflows caused by changes in foreign-currency exchange rates. | CF-- foreign currency |
Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Forward exchange contract with Anticipated inter-company transaction denominated in a foreign currency | To protect against changes in cash inflows or outflows caused by changes in foreign-currency exchange rates. | CF-- foreign currency |
Cumulative gains and losses on the derivative are recorded in other comprehensive income to the extent that they are offset by cumulative gains and losses on the hedged transaction. | No adjustment is made to the basis of the hedged item. |
Forward exchange contract withNet investment in a foreign operation | To protect against changes in the exchange rate of the subsidiary's local currency relative to the functional currency of the parent. | Net investment in a foreign operation |
Gains and losses on the derivative are recorded in the same manner as a translation adjustment (i.e., within equity) to the extent of the translation adjustment of the subsidiary. | The translation adjustment of the subsidiary's net assets is deferred in the translation-adjustments accounts within equity. |
Update Notice from Dr. Jensen
On June 15, 2000 after the BigWheels Case by Rachel Grant was completed, the FASB issued FAS 138 that makes it possible to get hedge accounting treatment for cross-currency swaps. The new FAS 138 is out today. Pay careful attention. Because this is one of the few standards that goes into effect today for some companies, the FAS 138 standard will a free download until June 30. Then you must purchase FAS 133. Go to http://www.rutgers.edu/Accounting/raw/fasb/ FASB Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—an amendment of FASB Statement No. 133 Bob (Robert E.) Jensen Jesse H. Jones Distinguished Professor of Business Trinity University, San Antonio, TX 78212 Voice: (210) 999-7347 Fax: (210) 999-8134 Email: rjensen@trinity.edu http://www.trinity.edu/rjensen
-----Original Message----- From: Gerhard Mueller, FASB Board Sent: Friday, June 16, 2000 3:01 PM To: 'Jensen, Robert' Subject: RE: FAS 138 Hi, Bob - The (four)amendments have been published today as SFAS 138. Thus there was at least some (temporary) happiness on Wall Street! All the best, Gerry
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