The final death of Short-Cut & Critical Terms Match under ASC 815 (FAS 133)

After FASB issued its long awaited Exposure Draft (ED) on Financial Instruments on May 26th, we held a series of client briefings and events and the general consensus is that change is not good.  In particular, the elimination of the abbreviated methods under ASC 815 (FAS 133), Short-Cut for interest rate hedging & Critical Terms Match (CTM), primarily leveraged for FX, was of great concern.  While many companies had already moved away from using the Short-Cut method for plain vanilla debt hedging, a simple survey of attendees showed that there are some who are still using it advantageously.  For Critical Terms Match it’s an entirely different issue as nearly all companies use this method for some part of their FX hedging program under ASC 815 (FAS 133).

It should come as no surprise that that FASB was going to re-introduce the elimination of these two methods, despite the negative comment letters they received on the topic when they first tried two years ago under FAS 133R.  IAS 39 currently does not allow these methods, and as one of the steps towards convergence (a big theme in the ED), these methods are still on the US chopping block.

FASB is hoping of course that changing the requirements around quantitative assessments from “highly” effective to “reasonably” effective would ease the reporting burden.  But most companies do not want to deal with the headaches of now measuring the ineffectiveness and reporting new P&L volatility, as small as it may be.

The comment period ends Sept 30, 2010, and no doubt the FASB will receive a lot of comments on this exposure draft.