A task force for the derivatives implementation group of the Financial Accounting Standards Board is likely to offer relief to corporates concerned about the tax treatment for hedging floating interest-rate exposure on commercial paper programs under the FASB's statement 133. Statement 133 requires derivatives to be recognized on the balance sheet at fair value. A task force for the derivatives implementation group is leaning toward allowing hedge accounting treatment for hedges on the LIBOR component of commercial paper programs, according to several members of the derivatives implementation group. Issuers likely will be able to match swaps to the program as a whole, rather than being forced to match swaps to individual issues.
Mike Joseph, partner at Ernst & Young in New York and a task force member, said the changes will make it much easier to get hedge accounting for cp hedges.
Roger Haley, an official in the corporate finance department of the treasury at Chevron Corp. in San Ramon, Calif., said that he would welcome this outcome. "It makes sense from a conceptual and practical application standpoint," he said. Chevron's current cp issuance is relatively low, but in the past it has made extensive use of swaps to hedge floating-rate exposure on cp.
The impact on the corporate swaps market could be big. According to Marc James, managing director and head of corporate derivatives marketing at Bear Stearns in New York, in the mid-1990s, swaps could account for some 40% of a corporate marketer's work. In part because of accounting treatment fears, that business has slowed to a trickle.
Bob Wilkins, senior project manager in charge of FAS 133 at the accounting standards board in Norwalk, Conn., declined comment on the results of the most recent task force meeting for this issue. He noted that any recommendations made by the task force have a long way to go before receiving final approval from the FASB. The issue would not likely be resolved until at least the middle of the year, and any recommendations could be modified before then, he said. But some players familiar with the process said that significant changes are at this stage unlikely.
