Financial Instruments – Fair Value Hedge Accounting of a Portfolio Hedge of Interest Rate Risk

Date recorded:

(Macro Hedging)

The Board discussed two issues related to the final standard. First, the Board decided that when prepayment estimates change, the entity should assume the change was a result of movements in interest rates, unless the entity can prove otherwise.

In addition, the Board decided to remove a paragraph from the exposure draft related to the application of hedging portions. The Board was undecided about whether a UK pound overdraft could be hedged with a US dollar instrument. That is, if a bank charges a rate on UK pound-denominated debt greater than a US dollar treasury rate, is that US dollar treasury rate a portion of the larger UK pound-denominated rate? The Board has decided to take this issue up with the FASB as a matter of priority for convergence.

The Board also discussed problems with the mechanics of the approach and the abilities to manage earnings. One Board member suggested he would dissent on this issue. The Board will discuss those concerns further on Friday 19 March.

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