|
Overview
Coverage
Accounting
Effectiveness
Disclosure
|
FAS 133 requires the method used to assess hedge effectiveness to be defined at the time of hedge designation; and this method must then be applied consistently - both at the inception of the hedge and on an ongoing basis. If the entity decides to improve upon this method, the original hedge must be de-designated and a new hedge relationship needs to be stipulated. If the same method is not applied to similar hedges, a justification for using differing methods is required.
Entities may elect to exclude specific components of hedge results from the hedge effectiveness assessment. Allowable excluded items are (a) differences between spot and forward (or futures prices), if the derivative is or contains a forward or futures contract, or (b) the time value or the volatility value of options, if the derivative is or contains an option contract. (Paragraph 63) Hedge effectiveness may be assumed to be perfect in two specific situations (Paragraph 68):
- If the hedging instrument is a forward contract that perfectly matches the intended forecasted transaction, with the forward having a market value equal to zero at the inception of the hedge.
- If the hedging instrument is a plain-vanilla interest rate swap (i.e., with no optionality) that perfectly matches (in terms of notional amounts, tenors, settlement frequencies, and payment dates) the hedged item to which it is paired.
The FASB has not sanctioned any particular methodology for assessing hedge effectiveness, and devising such tests is often non-trivial. Hedging entities are encouraged to discuss their intended approaches with their external auditors prior to initiating any hedging transactions.
|
