ExpertHard1 markMultiple Choice
CPA · Question 25 · Area 3: Technical Accounting and Reporting
Under ASC 815, which of the following conditions must be met to apply 'Short-Cut Method' hedge accounting for an interest rate swap?
Under ASC 815, which of the following conditions must be met to apply 'Short-Cut Method' hedge accounting for an interest rate swap?
Answer options:
A.
The swap must be effective within a range of 80-125%.
B.
Management must document the hedge within 30 days of inception.
C.
The swap must have a non-zero fair value at inception.
D.
The notional amount of the swap must match the principal amount of the hedged item, and the fair value of the swap at inception must be zero.
How to approach this question
The Short-Cut method is a 'free pass' to assume perfect effectiveness. To get it, everything must match perfectly. Same amount, same dates, same index, and no upfront payment (zero FV).
Full Answer
D.The notional amount of the swap must match the principal amount of the hedged item, and the fair value of the swap at inception must be zero.✓ Correct
ASC 815-20-25 allows the Short-Cut Method only if specific strict criteria are met, ensuring the swap mirrors the debt perfectly. Key criteria include: Notional amounts match, maturities match, no prepayment provisions, and the swap has a fair value of zero at inception (no upfront fees).
Common mistakes
Thinking 80-125% effectiveness applies (that's for the 'Long-Haul' method assessment).
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