This proposal provides guidance on certain practices involved in the application of one technique for determining hedge accounting, commonly referred to as the shortcut method. Designed to promote consistency in the practice of determining when an entity qualifies for the shortcut method, the proposal also provides investors and others with better information about how the shortcut method affects a company's financial statements.

The shortcut method prescribes a set of conditions that must be met in order for a reporting entity to assume that certain hedging relationships of interest rate risk would result in no ineffectiveness. Using the shortcut method vastly simplifies the necessary calculations involved in hedge accounting, as it assumes that the change in value of the swap is a "perfect proxy" for the change in value of the hedged item, thereby resulting in no income statement volatility (or "ineffectiveness").

"Currently, there is diversity in the way the shortcut method is applied by preparers of financial statements. That diversity has resulted in differences in financial statement information for similar transactions. This proposal seeks to reduce that diversity," said Louis Fanzini, FASB financial services industry fellow. "This proposal also is designed to reduce complexity in a way that makes it easier for preparers to understand the application of the shortcut method, resulting in clearer financial statements for the investor."

The board is seeking written comments on the proposal by Sept. 21. Parties interested in providing input on the proposal should submit their comments by email to director@fasb.org, File Reference No. 1530-100.

Those without email may send their comments to:

Technical Director—File Reference No. 1530-100
Financial Accounting Standards Board
401 Merritt 7
PO Box 5116
Norwalk, Connecticut 06856-5116