Hedge accounting MSR value increases

(continued)

Additionally, as the value of the MSR asset increases, existing impairment reserves may be recovered.

Dutch GAAP

Derivatives are closed resulting in the payment of 400 in cash. The offsetting entry increases 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 reduces the derivative asset/liability, but does not affect the MSR. The accounting follows:

Balance Sheet

Balance Sheet

MSR

1,000

MSR

1,000

Derivative Loss

400

FAS 133 basis adjust

600

Adjusted MSR Basis

1,400

Adjusted MSR Basis

1,600

MSR Fair Value

1,500

MSR Fair Value

1,500

Impairment, if any

0

Impairment, if any

(100)

Net MSR Basis

1,400

Net MSR Basis

1,500

Net Earnings Effect

Derivative Loss (deferred) 0

MSR Impairment 0

Net Earnings Detriment 0

Net Earnings Effect

Derivative Loss (400)

MSR Basis Gain 600

Impairment (100)

Net Earnings Benefit 100

0 0

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