Nội dung

DERIVATIVE ACCOUNTING & HEDGING UNDER FAS 133 By Jeffrey B. Wallace Managing Partner Greenwich Treasury Advisors LLC 1. Introduction................................................................................................................................1 2. Historical Background ................................................................................................................1 3. FAS 133 Framework ...................................................................................................................2 4. Derivative Definition ..................................................................................................................3 5. The Three FAS 133 Hedge Types ...............................................................................................4 6. Termination Events .....................................................................................................................6 7. Hedge Documentation................................................................................................................7 8. The Two Highly Effectiveness Tests.............................................................................................9 9. Measuring Ineffectiveness..........................................................................................................10 10. Three HET Exceptions .............................................................................................................11 11. Option Hedging .......................................................................................................................13 12. Minimizing Ineffectiveness........................................................................................................13 13. Minimizing Forecast Error Risk ................................................................................................14 Acknowledgements..........................................................................................................................15 About the Author............................................................................................................................15 References .......................................................................................................................................16 127 W. Putnam Avenue Greenwich, CT 06830 Phone: (203) 531-0835 Fax: (203) 531-7018 www.greenwichtreasury.com © 2003 by Greenwich Treasury Advisors LLC. An earlier version of this monograph appeared in The Handbook of International Finance & Accounting, 3rd Edition, edited by F. Choi (New York: John Wiley, 2003), and has been copyrighted 2003 by John Wiley & Sons, Inc. 1. INTRODUCTION FAS 133 is a substantial body of work, reflecting the inherent complexity of derivatives and the enormous range of possible hedging situations. It also reflects a Darwinian evolutionary process. The hedgers and their advisors repeatedly create hedges and derivative-like instruments structured to take maximum advantage of FAS 133’s ambiguities and exceptions, with two amendments and 175 Derivative Implementation Group (DIG) issues evolving to fix the holes being exploited. As a result, the Financial Accounting Standards Board’s latest FAS 133 compendium, the “Green Book,” encompasses 800 pages. Many of the Green Book pages, however, deal with limited exceptions to the general concepts of FAS 133. We will develop those general concepts by first summarizing the historical developments related to FAS 133 and why it is such a revolutionary document. The basic concepts of FAS 133 are then introduced: the overall framework, the derivative definition, the three different hedge types, hedge documentation, effectiveness testing, and termination risk. The three important exceptions to the effectiveness tests are then reviewed as well as the rules surrounding option hedging. We end with a review of the ways to minimize reported P&L ineffectiveness and forecast error. Necessarily, certain issues cannot be covered.The most important issue concerns bifurcating derivatives that are embedded in host contracts, although the main elements are discussed in Section 4, Derivative Definition. Three other major areas not covered are the disclosure requirements, which are listed in ¶44-47 (this and all subsequent ¶ references will refer to FAS 133 Green Book paragraphs); the substantial body of DIG issues involving commodity hedging; and taxes. Regarding the latter, all cash flow and net investment hedges must be tax-effected per FAS 130 and there are numerous FAS 133 book-US tax differences. 2. HISTORICAL BACKGROUND Prior to FAS 133, US GAAP derivatives literature was inconsistent and inadequate. There was no GAAP for commodity hedging. Derivatives were usually valued at Greenwich Treasury Advisors LLC • www.greenwichtreasury.com historic cost, which was often zero. FX options, but not forward contracts, were allowable hedges. Synthetic instrument accounting magically transformed a LIBOR swap of a CP portfolio into long-term fixed rate debt. Derivative losses were classified as assets but were most often entirely ignored. Issued in June 1998, FAS 133 declared that derivatives are assets and liabilities and should be recorded as such at their fair value on the balance sheet. It abolished synthetic instrument accounting. Instead, all derivative hedges must be documented and proven to a highly effective hedge of the underlying hedged position. If not, then any changes in the fair value of the derivative are to be recorded in current earnings. In addition, while a hedge may be highly effective, it may not fully hedge the underlying, and that difference — hedge ineffectiveness — must be reported currently in earnings. For the first time, US GAAP is requiring hedging performance, rather than hedging intent, as the criterion for determining whether to apply deferral accounting for the derivative gain or loss. Two surveys in 2001 and 2002 by the Association for Finance Professionals show that US corporate derivative hedging is now lower than prior to FAS 133. “Macro” or portfolio hedges are now much rarer. Arguably, the FASB has reduced the speculative “closet” hedging that led to so many well-known derivative debacles in the 1990’s. No longer are companies so willing to speculate, knowing that if the hedge goes wrong, they cannot avoid reporting the derivative losses in their financial statements. To flesh out FAS 133’s rigorous but vaguely stated requirements, the DIG was formed in August 1998. Consisting largely of Big 5 derivative experts, the DIG provided guidance to the FASB Staff for resolving some 175 questions on FAS 133. Organized alphanumerically in logical categories (e.g., F7 or G20), these “DIG issues” represent the Staff ’s (but not the Board’s) views on how FAS 133 is to be implemented. In May 1999, FAS 137 postponed for one year the mandatory adoption date for 133 because too many issues still needed resolution. In June 2000, FAS 138 corrected some obvious deficiencies. With restrictions, cash flow FX hedges could be netted, and cross-currency interest rate swap hedging of foreign debt was permitted. 1 Interest rate risk was redefined to be a benchmark interest rate, e.g., Treasuries, rather the all-in rate, including the credit spread. This eliminated a significant source of hedging ineffectiveness. In May 2002, FASB proposed a new amendment to FAS 133. Highly technical and criticized in its dissent section as inadequate by some Board members, the Board in September 2002 decided not to approve the amendment. It is not clear what further changes to FAS 133 will occur. What is clear is that the Board continues to view FAS 133 as an important first step towards its long-term objective of having all financial instruments — derivative and nonderivative — measured at fair value (¶247). Standing as it does between historical cost accounting and fair value accounting, FAS 133 is a hybrid document that admirably tries, but does not always succeed, to reconcile the differences between two fundamentally different accounting models. Documentation. • All hedging relationships must be “highly effective,” passing a documented Highly Effectiveness Test (HET). If not, then the hedge relationship must be terminated, and the net change in the value of the derivative is immediately and fully recorded in current earnings. • If highly effective, the change in the fair value of the derivative is allocated, in accordance with the hedge documentation, into three possible components: the “effective portion,” the “ineffective portion,” and “the excluded portion.” Changes in the ineffective and excluded portions are always recognized immediately in earnings, regardless of the type of hedging relationship. • If the hedge is a fair value hedge, the “effective portion” is also recognized currently in earnings. However, the hedged item is also fair valued on the balance sheet, with the change in fair value also going into earnings, where it will be offset by the change in the effective portion of the derivative. • If the hedge is a cash flow hedge, then the effective portion is recognized in Other Comprehensive Income (OCI) and then recorded on an after-tax basis in Accumulated Other Comprehensive Income (AOCI), a retained earnings account, in accordance with FAS 130. The AOCI is reclassed into earnings when the underlying hedged item impacts earnings. • If the hedge is a net investment hedge, the effective portion is also recognized in OCI and then recorded in AOCI, again in accordance with FAS 130. However, the AOCI is reclassed into earnings only when the subsidiary is subsequently sold or liquidated. • Hedge relationships can be voluntarily or involuntarily terminated. The latter occurs when the hedge relationship fails the highly effectiveness test or when the underlying hedged forecast is no longer probable or the hedged firm commitment is no longer firm. 3. FAS 133 FRAMEWORK Yet, despite two amendments and 175 DIG issues, t h e o r i g i n a l s t a t e m e n t e s t a b l i s h e d a ro b u s t accounting framework that has not been amended or changed, only clarified. FAS 133 defined for the first time what a derivative is, and then using that definition, proscribes that: • • All derivatives must be fair valued on the balance sheet, including those that are embedded in host contracts that are not normally fair valued under US GAAP. In the latter case, the derivative must be bifurcated from the host contract and then fair valued as if it was a stand-alone derivative. There are three types of hedging relationships: fair value (FV) hedges, cash flow (CF) hedges, and net investment (NI) hedges for four kinds of allowable risks: entire change in fair value, the change in fair value attributable to FX risks, the change in fair value attributable to changes in the benchmark interest rate, and the change in fair value due to credit worthiness of the instrument being hedged. These hedging relationships must be fully documented at the inception of the hedge and are more fully described in Section 7, Hedge Greenwich Treasury Advisors LLC • www.greenwichtreasury.com Anyone trying to understand FAS 133 must have a copy of the 800-page Green Book, which is a clean 2 statement of FAS 133 as amended as of December 2001. In it, various 133 paragraphs are annotated with references to specific DIG issues, which are also included in the bound volume. The biggest cause for confusion in FAS 133 is its use of the term “fair value.” At times fair value means fair market value, as in how an economist or bank trader would mark-to-market a derivative or financial instrument, and is always used in this sense for fair valuing a derivative on the balance sheet. However, in the effectiveness testing, fair value is best understood as a technical accounting term whose definition can vary considerably depending upon the actual hedge documentation. 4. DERIVATIVE DEFINITION Per FAS 133, ¶6, a derivative is a “… financial instrument or other contract with all three of the following characteristics: a. It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions, or both. These terms determine the amount of the settlement or settlements and, in some cases, whether or not a settlement is required. b. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. c. Its terms require or permit net settlement. It can be readily settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.” An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable. A notional amount is some sort of face value. Examples of derivatives include: FX forward contracts, FX options, interest rate caps and collars, interest rate swaps, forward rate agreements, cross-currency interest rate swaps, etc. However, there are a number of exceptions as to what qualifies as a “FAS 133 derivative.” These are listed in Greenwich Treasury Advisors LLC • www.greenwichtreasury.com ¶10, and include: 1. “Regular-way” security trades, i.e., normal security trades executed on an exchange. 2. Normal purchase and sales contracts involving the sale or purchase of something other than a financial instrument. 3. Certain insurance contracts. 4. Certain financial guarantee contracts. 5. Certain contracts not traded on an exchange, such as a weather-related derivative. 6. Derivatives that serve as impediments to sales accounting. There are also some other important exceptions listed in ¶11 involving derivative contracts of the company’s own stock or contingent consideration in a business combination. The ¶10-11 exceptions are supplemented by numerous DIG issues. An even more complicated area is embedded derivatives, in which there is a derivative meeting the ¶6 definition that is part of a “host contract” containing other contractual flows that do not in their entirety, qualify as a ¶6 derivative. In these situations, per ¶12, the embedded derivative must be bifurcated from the host contract and accounted for as a derivative instrument under FAS 133 if, and only if, all of the following conditions are met: • The economic characteristics and risk of the embedded derivative instrument are not clearly and closely related to the economic characteristics of the host contract. • The host contract, including the embedded derivative, is not remeasured at fair value under otherwise applicable generally accepted accounting principles, with changes in fair value reported in earnings as they occur. • A separate instrument with the same terms as the embedded derivative instrument would, pursuant to paragraphs ¶6-11, be a derivative under FAS 133. An example of an embedded derivative would be an S&P 500 stock option embedded in a bond. A stock index option is not clearly and closely related to the 3 normal interest nature of a bond. However, a convertible bond, where the bond is convertible to the stock of the bond issuer, would not be considered an embedded derivative due to the ¶11 exclusion of derivatives related to the company’s own stock. Overall, the intent of ¶6-16 and over 30 DIG issues (B1-33) is to apply FAS 133’s marking-to-market requirements to stand-alone financial derivatives as well as to derivatives deliberately “hiding” in host contracts that are not clearly and closely related to the host contract. At the same time, the Board wants to exclude bifurcating derivative-like instruments that are not normally considered derivatives and should not be marked-to-market. Nonetheless, embedded derivatives remain an elusive concept that has not been well defined to anyone’s satisfaction. 5. THE THREE FAS 133 HEDGE TYPES A FAS 133 hedge relationship is a documented and identifies an allowable hedged item’s financial risk(s) and a qualified hedge instrument. The hedge instrument is normally a derivative, but in certain cases can be an FX balance sheet exposure. The Venn diagram below shows the three types of FAS 133 hedge relationships, and how they interrelate with each other: FAS 133 HEDGE TYPES 4 Greenwich Treasury Advisors LLC • www.greenwichtreasury.com The schedule below expands on the Venn diagram by summarizing the major SUMMARY CATEGORY CATEGORY OF differences in the accounting for the three hedge types: FAS 133 ACCOUNTING BY HEDGE TYPE FAIR VALUE HEDGES CASH FLOW HEDGES NET INVESTMENT HEDGES Booked fixed IR exposures or a foreign currency firm commitment Anticipated or variable FX, interest rate or commodity exposures Equity position of a foreign affiliate Forward contract hedge of FC firm commitment Option hedge of a forecasted intercompany FC sale Forward contract hedge of Japanese subsidiary’s equity Fixed debt swapped floating Floating debt swapped fixed or an interest rate cap N/A Yes No Yes P&L accounting for the hedged instrument Immediately to P&L First to OCI, then to AOCI and then to P&L only when the hedged exposure is recorded in P&L No, only to OCI-CTA and then to AOCI-CTA B/S accounting for the hedge instrument Fair market value Fair market value Fair market value P&L accounting for the hedged item Immediately to P&L Only when normal GAAP would require booking of hedged item to P&L Only at sub liqudation B/S accounting for the hedged item Fair value Only when normal GAAP would require booking to the B/S Normal FAS 52 rules for CTA Measurement of hedging ineffectiveness FAS 133 rules FAS 133 rules FAS 52’s economically effective rules as revised by H6-11 Period for measuring hedging ineffectiveness Current period Cumulative from hedge inception Current period Hedged item example Foreign exchange example Interest rate example Foreign currency B/S exposures allowable instruments Greenwich Treasury Advisors LLC • www.greenwichtreasury.com 5 6. TERMINATION EVENTS If a hedge relationship fails the retrospective highly effectiveness test, then the hedge is terminated, and the deferred gain or loss on the derivative is recognized currently in earnings and then reported as a separate item in the footnotes in the annual report. For this reason, nearly all corporates will only do hedge accounting if they are very certain that the hedge will indeed be highly effective. Section 8, The Two Highly Effectiveness Tests, discusses the issues involved. In total, there are five different accounting treatments depending upon how the hedge is terminated and what kind of hedge it is: A. FV hedge fails the highly effective assessment (¶26) 1. Amounts previously recorded as of the last assessment (which was highly effective) remain deferred. If it is known exactly when the FV hedge failed the highly effectiveness test, can record the change in fair value on the hedged item up to the last day (week, month, etc.) it was highly effective. 2. If it is not known when exactly the hedge failed, then there is no marking-to-market of the hedged item for the current period, and the entire current period change in fair value of the hedge instrument goes to P&L (¶26). B. The firm commitment side of an FV hedge is no longer firm or the FV hedged item no longer exists (¶26) 1. Any amounts recorded on the balance sheet related to the change in fair value of the hedged item are reversed out to P&L (¶26). 2. Per ¶44.a.(2), this is an annual report footnote disclosure item. C. ACF hedge fails the highly effective assessment (¶32.b.) 1. Amounts previously recorded in AOCI as of the last assessment (which was highly effective) remain deferred. If it is known exactly when the CF hedge failed the highly effectiveness test, can record the change in fair value on the hedged Greenwich Treasury Advisors LLC • www.greenwichtreasury.com item in AOCI up to the last day (week, month, etc.) it was highly effective. 2. If it is not known when exactly the hedge failed, then there is no adjustment to AOCI, and the entire current period change in fair value of the hedge instrument goes to P&L (¶32). D. The forecast side of a CF hedge is no longer probable (¶33) 1. Any amounts recorded in AOCI related to the forecast error amount are immediately reversed out of AOCI and recorded in P&L (¶33 and G3). 2. ¶32 provides a two-month grace period for forecast error. In other words, a forecast that fails to happen by the defined hedged period is given an additional two months to happen before the derivative gain or loss on the forecast error amount must be recognized in earnings. 3. Per ¶44.b.(4), this is an annual report footnote disclosure item. E. Voluntar y termination by the company (¶25.c. for FV hedges and ¶32.c. for CF hedges) 1. For FV hedges, the amounts previously recorded on the balance sheet related to the hedged item remain fixed on the balance sheet (no reversal). 2. For CF hedges, the amounts previously recorded in AOCI remain in AOCI until the underlying hedged item impacts P&L. 3. For NI hedges, the amounts previously recorded in AOCI-CTA remain there until all CTA amounts are reversed (e.g., at unit liquidation). 4. There’s no explicit FAS 133 requirement to document voluntary termination. Market practice is to append a one-page document to the existing hedge documentation stating that the hedge was voluntarily terminated on a specific day, and providing the details of the mark-to-market on the derivative on that day and the resulting termination accounting. Regarding voluntary terminations, the ability 6 to voluntarily take hedges on and off at will without impacting prior deferral amounts means that all kinds of dynamic hedging strategies are implicitly allowed. However, since all prior deferred amounts remained deferred, FAS 133 prohibits entities from terminating their profitable hedges (i.e., cherry picking) so that selective hedge profits could be reported into current earnings. In any type of termination, if any derivatives from the terminated hedges are still outstanding, then they should continue to be fully marked-to-market on the balance sheet, with any subsequent change in fair value recorded in earnings. 7. HEDGE DOCUMENTATION FAS 133 requires that at the time an entity d e s i g n a t e s a h e d g i n g r e l a t i o n s h i p, i t m u s t document the method it will use to assess the hedge’s effectiveness in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged. The hedge documentation can be thought of as a mathematical algorithm for calculating numbers that are recorded in specific income statement, comprehensive income, and balance sheet accounts. The algorithm is to be so precise that anyone reading the documentation could apply it and arrive at the same numbers. The appropriateness of a given method for assessing hedge effectiveness depends upon the nature of the risk being hedged and the type of hedge instrument being used. An entity should use similar effectiveness methods for similar hedges (¶62). Thus, one could not use the time valueintrinsic value effectiveness method per ¶63.a. for certain European option hedges and also use G20’s assumption of perfect option effectiveness for other European option hedges. Unlike the ¶20 and ¶28 requirements for fair va l u e a n d c a s h f l ow h e d g e d o c u m e n t a t i o n , respectively, there’s no similar paragraph for net investment hedge documentation. FAS 133’s net investment hedging follows closely FAS 52’s NI hedging requirements, which do not have any specific documentation requirements. However, DIG Greenwich Treasury Advisors LLC • www.greenwichtreasury.com Issues H6-11 specifically deal with net investment hedging, disallowing previously acceptable FAS 52 NI hedges as well as requiring effectiveness testing for cross-currency interest rate swap net investment hedges. As a result, market practice is to document NI hedges as thoroughly as what FAS 133 requires for FV and CF hedges. Summarizing ¶20 and ¶28 as well as two fundamental DIG Issues, E7 and E8, the following items must be specified in the hedge documentation at the inception of the hedge: A. Risk management objective and strategy for undertaking the hedge transaction (¶20.a. and ¶28.a.) 1. Boilerplate text taken from the company’s risk management policy, which must exist. B. Description of the hedged item (¶20.a. and ¶28.a.) 1. If it is an unrecognized firm commitment or a forecasted transaction, one may want to have some sort of company internal reference number to allow easy tracking of what happens to the commitment or forecast. 2. For effectiveness purposes, the hedge item’s maturity and financial characteristics must be known so that it can be fair valued for effectiveness measurement purposes. C. The hedged item’s hedged risks (¶20.a. and ¶28.a.) 1. Allowable risks are overall changes in fair value or in cash flow; or one or more of these allowable component risks: benchmark interest rate risk, FX risk, and the credit risk of the obligor. 2. If the benchmark interest rate, then must indicate whether the benchmark interest rate is the Treasury rate or the LIBOR rate for US$ instruments or the appropriate benchmark, per market practices, for non-dollar instruments. 3. If it is FX or commodity risk, one must choose whether the hedged item’s FX risk being hedged is the risk of changes in (a) spot-to-spot 7 movements (¶165-172), (b) forward rate-toforward rate movement (¶121-126), (c) the entire change in the derivative’s fair value (i.e., present value using forward rates, ¶140-143), or (d) in cash flow hedges, the variability in expected cash flows beyond (or within) a specified level (or levels) on an option pricing model basis (G20). 4. For FV hedges of firm commitment, ¶20.a.(1) requires a documented reasonable method for recognizing in earnings the asset or liability representing the gain or loss on the hedged firm commitment. This could be spot-to-spot, forward-rate-to-forward-rate or fair market value. D. Description of the hedge instrument and ¶28.a.) (¶20.a. 1. If it is a balance sheet exposure, then it will be remeasured only on a spot-to-spot basis. Balance sheet exposures can be allowable hedge instruments only for foreign currency firm commitments in FV hedge relationships and in net investment hedges. 2. If a derivative, then the documentation should state how it will be fair valued, i.e., markedto-market, whether via a pricing model or by market quotes. E. Amounts, if any, that are excluded from the assessment of hedge effectiveness (¶20.a.(1) and ¶28.a.(1)) Per ¶63, three exclusions are possible — but not mandated — under certain circumstances. In each circumstance, any changes in the excluded component would be included currently in earnings, together with any ineffectiveness that results under the defined method of assessing ineffectiveness: 1. If the effectiveness of a hedge with an option contract is assessed based on changes in the option’s intrinsic value (IV), the change in the time value (TV) of the contract would be excluded from the assessment of hedge effectiveness. TV = option fair market value (FMV) less IV (¶63.a.). IV can be calculated in one of two ways: the spot rate less the strike rate (¶162) or the forward rate less the strike rate (E19). However, Greenwich Treasury Advisors LLC • www.greenwichtreasury.com per ¶162, IV cannot be negative. Per E19, additional aspects of an option’s time value can also be excluded: theta, vega, and rho. However, these “Greek” exclusions are rarely used in practice because of G20. 2. If the effectiveness of a hedge with an option contract is assessed based on changes in the option’s minimum value, that is, its intrinsic value plus the effect of discounting, the change in the volatility value of the contract would be excluded from the assessment of hedge effectiveness. Volatility Value = FMV of the option less minimum value, which is the present value of IV (¶63.b.). Again, IV can be calculated in the two ways noted above. This definition of the excluded amount is very rarely seen in practice. 3. If the effectiveness of a hedge with a forward or futures contract is assessed based on changes in fair value attributable to changes in spot prices, the change in the fair value of the contract related to the changes in the difference between the spot price and the forward or futures price would be excluded from the assessment of hedge effectiveness. This is called forward contract TV = contract forward rate less the spot rate (¶63.c.). F. Prospective assessment methodology (¶20.a.(1) and ¶28.a.(1)) 1. As explained in E7, upon designation of a hedging relationship (as well as on an ongoing basis), the entity must be able to justify an expectation that the relationship will be highly effective over future periods in achieving offsetting changes in fair value or cash flows. 2. That expectation, which is forward-looking, can be based upon dollar-offset (or simulations thereof ) as well as regression or other statistical analysis of past changes in fair values or cash flows as well as on other relevant information. 3. Other relevant information could be that the critical terms of the hedged item and the hedge instrument are the same (G9). 8