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Private companies simplified hedge accounting

The FASB recently issued guidance that provides a practical expedient for certain private companies that wish to apply hedge accounting to variable rate debt that is economically converted to a fixed rate borrowing using a receive-variable, pay-fixed interest rate swap.

The new guidance, codified by Accounting Standards Update 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Accounting Approach: a consensus of the Private Company Council, provides certain private companies with greater flexibility in meeting the hedge accounting documentation requirements and with relief from certain fair value measurement provisions in the FASB Accounting Standards Codification®, provided that an entity intends to economically convert variable rate debt into fixed rate debt using a “plain vanilla” swap contract and meets certain criteria.

The new guidance is effective for annual periods beginning after December 15, 2014, and for interim periods within annual periods beginning after December 15, 2015, although early adoption is permitted. Therefore, private companies with a calendar year-end are permitted to early adopt the practical expedient for qualifying swaps existing on the date of adoption, as long as their financial statements have not been made available for issuance.