GASB Proposes Guidance on Hedge Termination Events
March 23, 2011
The Governmental Accounting Standards Board (GASB) has issued an exposure draft that would amend Statement 53, “Accounting and Financial Reporting for Derivative Instruments.” The proposal seeks to clarify the difference between accounting and reporting for a hedge – such as an interest rate swap – that is terminated, versus a replacement of a counterparty or credit support provider to the swap.
GASB 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. Statement 53 requires that all accumulated deferred amounts be reported in investment income when a hedging derivative is terminated. Under Statement 53, some have questioned whether replacing a swap’s counterparty or the swap counterparty’s credit support provider constitutes a termination of the original agreement – and thus termination of the hedging instrument for financial accounting and reporting.
GASB’s proposal clarifies the existing requirements for the termination of hedge accounting and would amend subparagraph 22d of Statement 53 as follows:
The hedging derivative instrument is terminated unless all of the following criteria are met:
- The interest rate swap or commodity swap represents a liability of the government.
- The counterparty of the interest rate swap or commodity swap, or the counterparty’s credit support provider, is replaced with an assignment or in-substance assignment.
- The government enters into the assignment or in-substance assignment in response to the swap counterparty, or the swap counterparty’s credit support provider, either committing or experiencing an act of default or a termination event as both are described in the swap agreement.
Concerning the second requirement, when a swap counterparty or a swap counterparty’s credit support provider is replaced through an assignment or an in-substance assignment, the GASB concluded that the government’s economic position remains unchanged and the use of hedge accounting should not be terminated. The provisions of this proposed statement would be effective for financial statements for periods beginning after June 15, 2011. Earlier application would be encouraged. The exposure draft can be downloaded from GASB’s website. Comments should be submitted by April 15, 2011 to the GASB. NACUBO encourages public institutions to submit comments directly to GASB or to send comments to NACUBO for inclusion in our industry comment letter.
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