Dataline: Hedge accounting -- Applying the shortcut method to "late" hedges (No. 2011-22)

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Dataline / In depth 06/02/2011 by Assurance services
Dataline: Hedge accounting -- Applying the shortcut method to

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This Dataline discusses certain considerations in the application of the shortcut method of hedge accounting to a late hedge.

An issuer of debt or investor in an asset may seek to hedge the change in fair value of the instrument due to changes in interest rates at a point in time after issuance of the instrument (as opposed to concurrently with issuance). Issuers and investors may undertake such a strategy for a number of reasons, including attractive interest rate swap rates or the decision to gain more floating rate exposure. This is commonly referred to as a "late" hedge. Questions have arisen regarding whether it is appropriate to use the shortcut method of hedge accounting for such hedging relationships.

An entity that seeks to apply the shortcut method for a late hedge under the fair value hedging model should consider performing an analysis to demonstrate that the terms of the late hedge do not invalidate the assumption of no ineffectiveness that is required to apply the shortcut method of hedge accounting. This Dataline discusses certain considerations in the application of the shortcut method of hedge accounting to a late hedge.