Avoiding hits to earnings when swapping fixed debt to floating (Observations from the front lines)
Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.
Avoiding hits to earnings when swapping fixed debt to floating: December 2012
Many companies are transacting interest rate swaps to exchange higher fixed rates on existing debt to lower floating rates. Companies electing to pursue fair value hedge accounting treatment for these relationships are often unaware of the quantitative effort needed to support this special accounting treatment because the "shortcut" method is often not available.
Highlights in this issue:
- Short-term interest rates are low, and many companies issued fixed-rate debt when rates were higher, making it popular to swap to lower floating rates.
- If you're swapping fixed debt to floating, be aware of potential reporting risks and how much effort you'll need to support the cost savings on the back end.
- Be aware that complex hedge accounting treatment for these swaps may lead to earnings hits, or may not work at all.
- Balance your commercial goals with your reporting requirements and be better positioned throughout the hedging process.
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