Accounting & Auditing

Private Company Reporting:  Simplified Hedge Accounting for Certain Interest Rate Swaps

April 2014

U.S. generally accepted accounting principles (GAAP) now includes alternatives for private companies.  Accounting Standards Update (ASU) 2014-03, Derivatives and Hedging (Topic 815):  Accounting for Certain Receive-Variable Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach, issued in January 2014, provides private companies a practical expedient to qualify for cash flow hedge accounting under Topic 815.  The accounting alternative is available to private companies wanting to apply hedge accounting to variable-rate debt that is economically converted to a fixed-rate borrowing using a receive-variable, pay-fixed interest rate swap, provided certain conditions are met.

The update assumes there is no ineffectiveness in the cash-flow hedging relationship, eliminating the burden of assessing hedge effectiveness.  In addition, it expands the time frame to complete documentation requirements, introduces a new measurement approach (settlement value) and exempts the private company from certain fair market value disclosure requirements.

The simplified hedge accounting approach is available to all entities, except public business entities (as defined in ASU 2013-12, Definition of a Public Business Entity), not-for-profit entities, employee benefit plans within the scope of Topic 960-965 and financial institutions.  A private company can elect to apply this approach to any swap, on a swap-by-swap basis, whether existing at the date of adoption or entered into after that date, provided it meets all the requirements for applying this approach. 

The guidance is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted.  Private companies can apply either the modified retrospective approach or the full retrospective approach upon adoption.

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