Accounting for Private Company Interest Rate Swaps: An Overview With Planning Strategies

Date01 March 2017
AuthorDanny P. Hollingsworth,John M. Trussel
DOIhttp://doi.org/10.1002/jcaf.22261
Published date01 March 2017
10
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22261
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Accounting for Private Company
Interest Rate Swaps: An Overview
WithPlanning Strategies
Danny P. Hollingsworth and John M. Trussel
INTRODUCTION
The Financial
Accounting Foun-
dation’s Board of
Trustees established
the Private Com-
pany Council (PCC),
a body created in
2012 to improve the
accounting standard
setting process for
private companies
(Financial Account-
ing Foundation,
2012). For additional
details and back-
ground on the for-
mation of the PCC,
see Holzman (2013).
In January 2014,
the FASB issued
Accounting Stan-
dards Update
No. 2014-03, “Deriv-
atives and Hedging (Topic
815): Accounting for Certain
Receive-Variable, Pay-Fixed
Interest Rate Swaps—
Simplified Hedge Account-
ing Approach,” to address
accounting for interest rate
swaps for certain private com-
panies. This update provides
an alternative, simplified hedge
accounting, for receive-variable,
pay-fixed interest rate
swaps if certain crite-
ria are met. The new
accounting method
allows private com-
panies to more easily
classify these interest
rate swaps as cash
flow hedges, which
will provide more
predictable earnings
by reducing income
volatility. The pur-
pose of this article is
to provide an over-
view of the provi-
sions of this Update
and to offer planning
strategies for maxi-
mizing the benefits
and minimizing the
costs of receive-
variable, pay-fixed
interest rate swaps.
OVERVIEW OF HEDGE
ACCOUNTING AND FASB
UPDATE 2014-03
The PCC received input
through outreach that private
The Financial Accounting Standard Board’s (FASB)
Private Company Council (PCC) was created in
2012 to improve the accounting standard-setting
process for private companies. Due to influence
from PCC, the FASB issued Accounting Standards
Update No. 2014-03 in January 2014 to address
accounting for interest rate swaps for certain
private companies. The issue addressed was the
complexity of complying with ASC 815 rules that
are highly detailed and difficult to implement. The
FASB Update provides an alternative, simplified
hedge accounting, for receive-variable, pay-fixed
interest rate swaps if certain criteria are met. This
accounting method allows private companies to
more easily classify these interest rate swaps as
cash flow hedges, which will reduce income vola-
tility and aid in compliance. This article provides
an overview of the provisions of this update and
offers planning strategies for maximizing the ben-
efits and minimizing the costs of receive-variable,
pay-fixed interest rate swaps. © 2017 Wiley Periodicals, Inc.
Refereed (Double-Blind
Peer Reviewed)

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