Accounting for Interest Rate Swaps
Majewska, Joanna D.
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Interest rate swap agreements are rapidly gaining popularity as the tool of choice for managing financial uncertainties. Unfortunately, since th~ are relatively new and the FASB has not yet issued a formal pronouncement as to how they should be accounted for, it is up to the users of interest rate swaps to decide on the accounting method. The FASB has, however, issued several pronouncements pertaining to disclosures about interest rate swaps in the financial statements. This paper defines what interest rates are, examines current reporting requirements, analyzes selected company disclosures, and determines how interest rate swaps should be accounted for. To accomplish my goal, I have researched existing FASB pronouncements, articles already written on the topic of interest rate swaps, and I also looked at a number of annual reports to determine compliance with disclosure requirements. What I found was that even though the existing FASB pronouncements (SFAS No. 105, SFAS No. 107, and SFAS No. 119) specifically outline what types of information should be disclosed for interest rate swap transactions, many companies meet only the minimum requirements, and some don't even meet the bare minimum. I believe that merely disclosing interest rate swaps in the footnotes to the financial statements is not enough. The swap transactions should be included on the face of the financial statements. The interest rate swap agreements should be accounted for by marking them to market and they should be divided into those held for trading purposes, with gains or losses recognized in current income, and those held for other purposes, where gains or losses would be deferred as a separate component of equity.