本备忘录是分析交易对两次加息利率互换斯巴达赌场（斯巴达或“公司”）的正确处理，2009年进入了讨论确认，计量和衍生品等相关问题，并根据会计准则汇编（ASC）套815 （衍生品和对冲）。
This memorandum is to analyze the proper treatments of the transactions regarding two interest rate swaps Spartan Casino (Spartan or the “Company”) entered in 2009 by discussing recognition, measurement and other related issues of derivatives and hedging under Accounting Standards Codification (ASC) 815 (Derivatives and Hedging).
FACTS 事实在1/1/2009，斯巴达与执行尤伯杯银行股份公司（尤伯杯）一250 $亿美元的循环信贷额度与美元LIBOR + 650个基点（BPS）从1/1/2009到12/31/2010利息率。斯巴达具有1M〜，3M-，并在每次绘制下来的信用额度时6M-美元LIBOR的选择，而利息支付是基于LIBOR的男高音斯巴达选择结算。借来的主要是通常从提款日到期的五年中，从而使每笔提款都有一个特定的到期日。在2009年，斯巴达画倒在信贷额度的两倍。为了对冲与两个先前对冲债务的基础上变化相关的预测利息支出，斯巴达已经订立两份利率掉期到原来的浮动利率支付转换为固定利率支付。在12/31/2010，决定预付2500万$的$ 125个万元欠款而不受处罚。同时，本公司不进行其他更改衍生物其资本结构。在2009年和2010年发生的交易的摘要如下所示：On 1/1/2009, Spartan executed a $250 million revolving credit facility with Uber Bank AG (Uber) with a rate of interest of USD LIBOR + 650 basis points (bps) from 1/1/2009 to 12/31/2010. Spartan has a choice of 1M-, 3M-, and 6M-USD LIBOR each time it draws down on the credit facility, and the interest payments are settled based on the LIBOR tenor that Spartan chose. The principal borrowed is typically due five years from the drawdown date, so that each drawdown has a specific maturity date. During the year 2009, Spartan drew down on the credit facility twice. In order to hedge the forecasted interest payments associated with the changes in the basis of the two previously unhedged debts, Spartan has entered into two interest rate swaps to convert the original variable interest payments to fixed interest payments. On 12/31/2010, decided to prepay $25 million of the $125 million debt without penalty. At the same time, the Company does not make other changes to its capital structure of derivatives. The summary of the transactions happening in 2009 and 2010 is shown below: ISSUES 问题Regarding all the transactions happened, issues that need to be addressed are as follows: . Are the two interest rate swaps qualified for being recognized as derivatives? . If the two interest rate swaps are qualified as derivatives, what criteria the Company need to meet and document to ensure the interest rate swaps achieve hedge accounting? . What type of hedge Spartan has to designate in order to meet its demand of hedging the forecasted interest payments associated with the changes in 3M-USD-LIBOR of the two previously unhedged debts? . What are the appropriate accounting treatments for the two hedging relationships, assuming they are perfectly effective? . What are the implications of the Company prepaying $25 million of the $125 million total borrowing? APPLICABLE LITERATURE适用的文学
The applicable literature in this case is ASC 815 (Derivatives and Hedging). This codification gives guidance on the recognition, measurement and all other related issues regarding derivatives and hedging. In order to determine whether the two interest swaps are qualified as derivatives, requirements in ASC 815-10-05 (Derivatives and Hedging-Overview and Background) and ASC 815-10-15 (Derivatives and Hedging -Scope and Scope Exceptions) should be followed. When it comes to the criteria, document requirement and classification of hedge accounting, ASC1. Documentation requirement: 815-20-25 (Derivatives and Hedging-General – Recognition) provides full guidance. The subsequent measurement of cash flow hedges is addressed in ASC 815-20-35 (Derivatives and Hedging-General-Subsequent Measurement) and ASC 815-30-35 (Derivatives and Hedging-Cash Flow Hedges-Subsequent Measurement) are applicable. The implication of prepayment is addressed in ASC 815-20-25 (Derivatives and Hedging-HedgingGeneral-Recognition), ASC 815-20-35 (Derivatives and Hedging-Hedging-General-Subsequent Measurement) and ASC 815-35-40 (Derivatives and Hedging-Cash Flow Hedges-Derecognition).
DISCUSSION & ANALYSIS 讨论与分析Derivative financial instruments recognition ASC 815-10 (Derivatives and Hedging-Overall) addresses the criteria for a financial instrument to be treated as a derivative instrument: 15-83 A derivative instrument is a financial instrument or other contract with all of the following characteristics: a. Underlying, notional amount, payment provision. The contract has both of the following terms, which determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required: 1. One or more underlyings 2. One or more notional amounts or payment provisions or both. Par. 15-83(a) lists “underlying, notional amount, payment provision” as the first characteristic of a derivative. As for the two interest rate swaps that the Company has entered, the underlying is the interest rate index of 3M-USD-LIBOR, and the notional amounts is $50 million of swap 1 and $75 million of swap 2. 15-83: … b. Initial net investment. The contract requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors… Par. 15-83(b) states that in order to be treated as derivative instruments, “the contract requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.” ASC 815-10 (Derivatives and Hedging-Overall) gives an example of the usual net initial investment of a swap: 3
15-95 A derivative instrument does not require an initial net investment in the contract that is equal to the notional amount (or the notional amount plus a premium or minus a discount) or that is determined by applying the notional amount to the underlying. For example:… b. A swap or forward contract generally does not require an initial net investment unless the terms favor one party over the other… Both swap 1 and swap 2 does not require net investments. 15-83: … c. Net settlement. The contract can be settled net by any of the following means: 1. Its terms implicitly or explicitly require or permit net settlement... As for “net settlement” addressed in par. 15-83(c), an interest rate swap permits net settlement as the gain or loss a swap brings to the company. In summary, both swaps that Spartan has entered meet the criteria of derivative instruments so ASC 815 (Derivatives and Hedging) is applicable here. Furthermore, once a financial instrument is qualified for derivative financial instrument, certain accounting treatments are required. ASC 815-10 (Derivatives and Hedging-Overall) gives guidance on the recognition, classification and measurement of derivatives: 05-4 This Topic requires that an entity recognize derivative instruments… as assets or liabilities in the statement of financial position and measure them at fair value. If certain conditions are met, an entity may elect, under this Topic, to designate a derivative instrument in any one of the following ways: a. … a fair value hedge b. … a cash flow hedge c. A hedge of the foreign currency exposure… The two interest rate swaps should be recognized in the statement of financial positions as either an asset or a liability and should be measured at their fair value. Meanwhile, if certain conditions are met, the two swaps could be further classified as a specific type of hedge. The section below would analyze the criteria for a derivative to be treated using hedge accounting. . Hedge accounting criteria and documents ASC 815-20 (Derivatives and Hedging-Hedging-General) addresses the issue of “Formal Designation and Documentation at Hedge Inception” as follows: 25-3: Concurrent designation and documentation of a hedge is critical…To qualify for hedge accounting, there shall be, at inception of the hedge, formal documentation of all of the following… Below is the summary of all the criteria and documentation requirement stated in ASC 815-20-25-3 applicable in the current situation:
1. Documentation requirement: 4
2. Criteria: 1) Hedged item As for hedged items, ASC 815-20 (Derivatives and Hedging-Hedging-General) has further requirements as stated below: 25-6: … The benchmark interest rate being hedged in a hedge of interest rate risk shall be specifically identified as part of the designation and documentation at the inception of the hedging relationship. An entity shall not simply designate prepayment risk as the risk being hedged for a financial asset... In the two interest rate swaps that the Company has entered into, the benchmark interest rate is the 3M-USD-LIBOR and is identified as a part of designation at the inception of the hedging relationship because the receive leg is 3M-USD-LIBOR + 650 bps and the interest rate swaps are used to hedge the cash flows of interest payments associated with the risk of variability in the 3M-USD-LIBOR. Further documentation is needed for making the interest rate swaps qualified as hedges. Specifically in the United States, only certain types of interest rate index can be used as benchmark interest rates, as addressed below by ASC 815-20 (Derivatives and Hedging-Hedging-General): 25-6A: In the United States, currently only the interest rates on direct Treasury obligations of the U.S. government and, for practical reasons, the London Interbank Offered Rate (LIBOR) swap rate and the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate) are considered to be benchmark interest rates. In each financial market, generally only the one or two most widely used and quoted rates that meet these criteria may be considered benchmark interest rates. Both swap 1 and swap 2 use LIBOR as a benchmark interest rates, so it meets the requirement set above. 2) Risk being hedged For the Company’s case, the hedges involved the benchmark interest risk, so 815-20-25-15(j) under ASC 815-20 (Derivatives and Hedging-Hedging-General) applies here: 25-15(j): If the hedged transaction is the forecasted purchase or sale of a financial asset or liability (or the interest payments on that financial asset or liability) or the variable cash inflow or outflow of an existing financial asset or liability, the designated risk being hedged is any of the following:… 2. The risk of changes in its cash flows attributable to changes in the designated benchmark interest rate (referred to as interest rate risk)… 4. The risk of changes in its cash flows attributable to all of the following (referred to as credit risk)… The hedged transaction here is the variable cash inflow or outflow of an existing financial asset or liability, and the purpose of entering into the interest rate swaps is to hedge against cash flows of interest payments associated with the risk of variability in the 3M-USD-LIBOR, so the risk being 6 |