Hedge accounting MSR value declines

Under Dutch GAAP out performance of hedges is not recognized in earnings, but rather as a reduction of the MSR.

Conversely, under US GAAP, income is recognized on the hedge and an offsetting Impairment is recognized on the asset.

(continued)

Dutch GAAP

Derivatives are closed resulting in the receipt of 600 in cash. The offsetting entry reduces the MSR book basis as follows:

US GAAP

Derivatives are marked to market each period through earnings. The MSR also is marked to market each period for the risk hedged. Closing a derivative position simply reduces the derivative asset/liability, but does not affect the asset. The accounting follows:

Balance Sheet

Balance Sheet

MSR

1,000

MSR

1,000

Derivative gain

(600)

FAS 133 basis adjust

(400)

Adjusted MSR Basis

400

Adjusted MSR Basis

600

MSR Fair Value

500

MSR Fair Value

500

Impairment, if any

0

Impairment, if any

(100)

Net MSR Basis

400

Net MSR Basis

Derivative Gain (deferred) 0

MSR Impairment 0

Net Earnings Impact 0

Net Earnings Effect

Derivative Gain 600

MSR Basis Loss (400)

Impairment (100)

Net Earnings Benefit 100

0 0

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