FX Hedging at Risk in New FASB Exposure Draft

Presented by: Helen Kane FX Hedging at Risk in New Exposure Draft? August 13, 2010

Purpose of this webinar
July 2010 HT-FASB Conversation
FASB Process
2008 Exposure Draft Language
2008 Exposure Draft Interpretations
Communicating Your Concerns
Update August 2010
Agenda

Purpose
Explain the FASB process that may put cash flow currency hedging of intercompany transactions at risk
Educate companies on what and how intercompany hedging strategies are at risk of losing cash flow hedging treatment
Detail what to do today , and what to do after the redline version issued.

FASB Process
The Board identifies a financial reporting issues based on requests/recommendations from stakeholders.
The FASB Chairman decides whether to add a project to the technical agenda
The Board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff.
Interco element missed this deliberation

FASB Process – Where We Are Today
The Board issues an Exposure Draft to solicit broad stakeholder input
Exposure Draft indicating what changes are proposed
May 26, 2010
Redline version of ASC 815 (actual text)
Pending (recent estimate “end of August”)
Comment Letters due September 30, 2010

FASB Process – Yet to Come
Board holds public roundtable meeting(s) on the Exposure Draft (must register if interested)
Two on October 12, 2010, and
Two on October 21, 2010
Solicited Field Visits
Staff analyzes
comment letters ,
public roundtable discussion, and
any other information obtained
FASB redeliberates the proposed provisions,
I ssues an Accounting Standards Update (ASU)
Detail implementation date and adoption “rules”

May 2010 Derivatives Conference
FASB Project Manager
Derivative Accounting Changes
Redline version likely to have all changes proposed in 2008 ED except prohibition against interest rate “benchmark” hedging

July 2010 Conversation – Other Information
HT & FASB Project Manager & Staff
Redline version likely to have all changes proposed in 2008 ED except prohibition against interest rate benchmark hedging
Re-inserting prohibition on interco hedging is consistent with current ED which indicates there would be no changes in hedged risks or transactions
Examples of interco hedging in current GAAP would be excised

What did the 2008 ED say
Paragraph 29
29. A forecasted transaction is eligible for designation as a hedged transaction in a cash flow hedge if all of the following additional criteria are met:
c. The forecasted transaction is a transaction with a party external to the reporting entity ( except as permitted by paragraph 40 ) and presents an exposure to variations in cash flows for the hedged risk that could affect reported earnings.

Addition to paragraph 40
Paragraph 40 pre-addition:
A nonderivative financial instrument shall not be designated as a hedging instrument in a foreign currency cash flow hedge.
A derivative instrument designated as hedging the foreign currency exposure to variability in the functional-currency-equivalent cash flows associated with
a forecasted transaction (for example, a forecasted export sale to an unaffiliated entity with the price to be denominated in a foreign currency), a recognized asset or liability,an unrecognized firm commitment, or
a forecasted intercompany transaction (for example, a forecasted sale to a foreign subsidiary or a forecasted royalty from a foreign subsidiary)
qualifies for hedge accounting if all the following criteria are met

Addition to paragraph 40
. “(However, the requirement in paragraph 29(c) that the forecasted transaction presents an exposure to variations in cash flows that could affect reported earnings must still be met at the level being reported on. (For example, in the financial statements of a consolidated entity, there would need to be a potential earnings effect that survives consolidation .)

Audit Firm Interpretations from 2008
Mild: Amendment is merely clarifying guidance, no change in types of items qualifying for cash flow hedge accounting treatment
Middle: eliminates hedge accounting for royalties and other (non-widget) transactions
Severe: Fundamentally alters and limits the types of transactions available for cash flow currency hedging (effectively eliminates hedging of all intercompany transactions within consolidated reporting).

GAAP Drift
Green Book Support
¶40
¶469-471, 474, 475-478, 481-487
DIG H13
ASC Support
ASC 815-20-25-38d
No equivalent
ASC 815-30-55-86 to 90

Revisit Comment Letters From 2008
Comment letters supporting changes to intercompany hedging in 2008: 0 (zero)
Comment letters opposing changes to intercompany hedging in 2008 ( http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=1590-100 )
Letters 17, 21, 26, 29, 33, 39, 40, 42, 46, 55, 59, 62, 65, 76, 82, 85, 88, 91, 94, 99, 102, 104, 105, 108, 112, 113, 118, 119, 120, 122

Update on May-to-Date Lobbying
August 10 Conversation between FASB & National Office Partner
FASB staff is considering that 2008 intercompany language be dropped in redline
Alternative would be to legitimize (?) current intercompany hedging practices
Would require deliberations

What to do Today
Contact your Local Audit Partner
Unless you already have a relationship with National Office Derivative Accounting Specialists
Ask him/her to communicate your concern to National Office that FASB may reinsert 2008 ED language around intercompany hedging without due process
Communicate how loss of hedge accounting for anticipated intercompany FX transactions would negatively impact your company
Ask them to lobby FASB staff to drop 2008 language prior to redline

Where to Go From Here
Making sure your audit partner communicates your use and dependence on intercompany cash flow hedging to National Office. Request National Office to lobby FASB staff to keep 2008 language OUT.
Carefully read redline version when issued to ensure language is not reinserted
If issued with prohibition read 2008 comment letters, prepare your own and submit by September 30

Reference Paragraphs
Derivative & Hedging Guidance buried throughout the standard:
Questions from FASB on hedging
Questions 56-58 and 61-64
Proposed guidance: 110-128
Implementation guide: IG172-180
Background/conclusions: BC216-235

FAS 133/ASC 815 Derivative Accounting 408-350-8580 [email_address]

FX Hedging at Risk in New FASB Exposure Draft

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FX Hedging at Risk in New FASB Exposure Draft Presentation Transcript