The Governmental Accounting Standards Board has proposed guidance on how to apply the accounting standards when a hedging derivative is terminated for a government entity.
The proposed guidance comes in the form of an exposure draft, Derivative Instruments: Application of Hedge Accounting Termination Provisions (an amendment of GASB Statement No. 53). 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 hedge accounting cease, and all accumulated deferred amounts be reported in investment income, when a hedging derivative is terminated.
Under Statement 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 proposed statement 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 be applied.
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 deadline for submitting written comments on the exposure draft is April 15, 2011.
Copies of the ED may be downloaded free of charge from www.gasb.org.
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