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Deloitte
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Heads
Audit and Enterprise
Risk

Up
Services

2-f--fl

AcJ

March 19 2007

Using the Critical-Terms-Match

Vol 14

Issue

Method
SEC
by

for Evaluating Key

Hedges

In This Issue

Staff

Identifies

Considerations
and Communications
professional

Deloitte

Touche 15

LLPS Accounting

Standards Joe

Group
accounting fellow

racfrciround

At the
of

March
Office

2n07
of

EITF

meeting

McGrath

Sp

cii

cs

SEC

Staff

Scm

rEt

in

the

SECs

the Chief Accountant the
critical

OCA

made method
relief

much
for

awaited evaluating

informal

Putcntial

FASB

Arson

announcement
effectiveness of
will

concerning widely used avoid

terms match To the

the
of their of

hedge

strategies for effective

of

hedgers

many

companies

restatements

but not perfect

hedges

Specifics

Mr

McGraths

remarks

follow

our background

discussion

Background
The remarks followed and
discussionst of held

by the SEC

staff

with

representatives

of

major on by

accounting Corporate Timothy The

firms

members
The

the

Financial

Executives
in

Internationals to

Committee
speech

Reporting Kviz another focused
of

discussions

were

held

response
in

December

professional

accounting about
raised

fellow

the

OCA
match

speech 65
past

on

staff

concerns and

the

critical

terms
that

method see
need

paragraph
to
As Heads

Statement

1332

the specter gave

restate

financial

statements.3

Mr

Kviz to

many hedgers would the following two examples of
circumstances
in in

developments the

warrant National

Up

mismatches
is

briefly

summarized

below
that

illustrate

which

registrants relationship

prepared standards Deloitte

by and

Office

Accounting Group of

have while

inappropriately ignoring

assumed
sources

there
variability

is

no
that

ineffectiveness

hedging

communications LLP

known
in

of

arent

perfectly

matched
and the hedging

Touche

lDeloitte see

Touchel

mismatch
ror subscription inforwation the back

the settlement

dates

of

forecasted

transactions

instrument
page
This publication and contains Deloitte general Touche

mismatch
is

in

the cash

payment dates on

variable

rate

debt

and

an

interest

rate

information

only of
this

not

swap

by

means

publication financial

rendering investment

Mr
or for

Kviz

accounting iegal srnics such be tan

business or other

went on
in

to

say

that

when
and

company
neither

inappropriately

assumes the

the

lack of

of

ineffectiveness
piofessional not advice

these

hedges

measures
that

nor an

records exists

amount
should

Thh

publication advice

is

substitcte

ineffectiveness

the SEC
if

staff generally

believes

error

that

be

professional used

or

services decision Before

nor

should

measured

as

hedge

accounting

were

not applied

it

as

basis

for any business

or action

that

may

affect

your or taking

making

any

decision

any you

action

that

may

affect

your

business

should

consult Deloitte

qualified

professional

advisor

See FASB
shall

Deloitte

Touche

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133
Accounring aids

up

January
tor

18

2007
Insrrumenrs

Touche
not be

Statemunt
Deloitte

its

affiliates

and

related

No
Touche

Denvarive

and

entities

Hedging

Acrivirses

See
responsible
for

any on

loss

sustained

up December

21 2006

by

any

person

who

relies

this

publication

Example Remarks

Illustrating at

the Issue Raised
EITF

in

the December Speech

Before

Consideration

of

the Staff

the March

Meeting
forecasted each euro

Company
customers The

U.S
sales

entity are

hedges expected

probable to
it

denominated
day during the

sales

of

its

product

to To

its

foreign the

occur

business

month

of

March 15

hedge

to the euro enters into euro/dollar companys exposure documents that uses the critical-terms match method at the
it

swap
inception

that

settles

on March

Company

of the of

hedge
caused by the
difference
in

In

doing
actual

so however
dates documentation sources
If

the

of the

Company sales and
used the

has ignored

an

identifiable

source

variability

the settlement
critical in

date

of

the foreign
for

currency

swap
for

Because and
did

Company
not
factor

Xs
in

hedging

terms-match the assessment

method
does
for

assessing

effectiveness qualify

identifiable

of

ineffectiveness
is

the the

company
transaction of

hedge

accounting
as
if it

from never

inception
qualified

the answer

no

should

Company
record
all

account changes
in

from
foreign

inception

had
in

for

hedge

accounting

and

the

fair

value

the

currency

swap

current

earnings

Many

entities

have

been
of

evaluating

the

effectiveness

of

hedging

relationships of ineffectiveness
in

only

for

provisions

that

have
of

reasonable
potential

possibility ineffectiveness

creating

more than
been evaluated

de
only

minimis

amount

Often other sources
without documentation

have

qualitatively

and

many cases

Specifics
Hedgers
will

of

SEC

Staff
critical

Remarks
terms-match
quantitative

who

use the

method should
assessment

confirm

the
to

basis

for their

assertion

that

ineffectiveness

be

de

minimis by making
their existing
critical

According

Mr

McOrath

registrants

should
of their

Revisit

terms-match

hedging
is

relationships
in

and

confirm the reasonableness and
that

original
is

assessments

that

the hedging

relationship

fact

highly

effective

any

ineffectiveness

de

minimis
If

they havent

already has been
of

make
de

quantitative

assessment

specifics

were

not prescribed

to

determine

that

ineffectiveness

minimis the reasonableness
it

If

the

results are

this analysis

support

of

registrants
its

original of

conclusion the
critical

that

the hedging match hedge

terms

essentially

matched

then

should

continue

with

application

terms

accounting

Mr McGrath
currency

also

provided

certain

parameters
in

in

performing

assessments

of

hedges over

of

forecasted period

foreign

denominated

transactions

which
settles

the forecasted once
that

transactions
It

occur

stated

monthly

or

quarterly but the hedging the

instrument

during the period the terms
are

outcome

of

the the

quantitative

assessment

may be reasonable to conclude pending matched when the hedging essentially
of

instrument outside
of

and one

settle within hedged transactions month window Mr McGrath urged

one month
the

each
to

other

However
situation

when
with

settlement the SEC

is

registrant

discuss

the

staff

Example

Application

of the Announced

SEC

Staff

Approach
in

Company
settled
in

should

revisit

hedges be

such to

as the
result
in

one

discussed

the

above

example

asking

whether
the

any

nonmatched terms would
the

expected

no more than

de

minimis to

ineffectiveness

Because of de both

swap

same month

that

the forecasted

sales

were expected
confirm
that

occur

the assumption
quantitatively

minimis

ineffectiveness since inception

may be reasonable and on an ongoing

Company
basis

should

assumption

historically

Potential FASS Action
In

April the FASB

will

consider adding which
or

to

its

agenda
and

project

that

may address
they must

questions about
in

the

critical-terms

match no

method

such
to

as

terms
assess

are

critical

how

closely

match

order

to

conclude

there

is

ineffectiveness

record

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