Deloitte & Touche LLP Ten Westport Road PO Box 820 Wilton, CT 06897-0820 Mr. David R. Bean Director of Research and Technical Activities, Governmental Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 Tel: +1 203 761 3000 Fax: +1 203 834 2200 www.deloitte.com Preliminary Views of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Derivatives Dear Mr. Bean: Deloitte and Touche LLP is pleased to comment on the April 28, 2006, Preliminary Views document of the Governmental Accounting Standards Board, Accounting and Financial Reporting for Derivatives (the Preliminary Views or PV ). Overview We strongly agree with the Board s preliminary conclusion that derivatives be recognized and measured at fair value in a government s balance sheet. A derivative held by a government exposes that government to market volatility associated with an underlying asset or liability, but does not require that government to invest or receive proceeds in the amount of the underlying. Current governmental accounting tracks only the costs or proceeds of the derivative, which is not representative of the government s full exposure due to the leveraged nature of the derivative. Accordingly, we believe that fair value is the most relevant measurement attribute for derivative instruments. We also believe that fair value generally is the most relevant measure for other financial instruments. In an attempt to relieve entities from having to qualify for certain types of hedge accounting, the FASB is proposing to provide entities an option to account for selected financial assets and financial liabilities at fair value. We recommend that the Board consider providing governmental agencies a similar option. Although this wouldn t remove the need for hedge accounting, offering such an option to governments could allow a government to recognize the effects of economic hedges without having to qualify for hedge accounting. By electing to use the fair value option, a government would record both the financial instrument that gives rise to the risk exposure (e.g., issued debt) and the hedging derivative at fair value with changes in fair value recorded in the change statement. While the informational needs of constituents of governments may differ from those of for-profit entities, we question whether the Board s approach of developing a new standard on derivatives and hedge accounting will best meet the needs of financial statement preparers and users. As the Board is aware, the FASB, through extensive deliberations and redeliberations, dealt with many of the same issues the Board is currently facing. We recommend that the Board leverage the previous efforts of the FASB and focus on developing guidance for only those areas where governmental accounting should diverge from Statement 133. In other words, we recommend the Board require its constituents to follow all of the requirements of Statement 133 except for those
Page 2 differences specified by the Board. Based on the relatively plain-vanilla nature of many derivatives used by some governments, we do not believe that following the provisions of Statement 133 would be significantly more difficult or complicated than applying the guidance outlined in the PV. If the Board concludes that developing a new standard is a more desirable approach, then the new standard should clearly articulate the extent to which Statement 133 and its related interpretive guidance can be used as a resource in interpreting the guidance in the final GASB standard. Otherwise, financial statement preparers and users and their auditors will extensively analogize to Statement 133, which may not be consistent with the Board s overall intent. In addition, we believe any standard will need to provide significantly more implementation guidance than what is provided in the PV. Furthermore, although the PV permits the use of quantitative methods in assessing hedge effectiveness, it provides no examples of how to apply these methodologies. Including such examples in a final standard will be critical if the standard is meant to stand alone. Conceptual Concerns If the final standard is intended to stand alone, it should explicitly state the fundamental concepts that serve as a foundation for its guidance, in a manner similar to how Statement 133 describes its four cornerstones. Our inability to refer to the PV s underlying concepts makes it difficult to understand the Board s rationale for certain fundamental decisions, such as the treatment of hedge ineffectiveness and the use of deferral accounting. We believe the final standard should require the ineffective portion of a hedging relationship to be recognized in the statement of changes. Allowing deferral of hedge ineffectiveness raises conceptual questions about the meaning of effectiveness, the propriety of treating all effective hedges as perfect hedges in the financial statements and interperiod equity. We believe the ineffectiveness of a hedging relationship generally relates to the current period and should not be deferred to later periods. The PV proposes requiring quantification of ineffectiveness for purposes of disclosure; we do not believe that recording ineffectiveness in the change statements would impose an additional burden on preparers. We also have several conceptual questions regarding the methods of evaluating hedge effectiveness. If the Board proceeds with developing a new standard, we believe it must rethink how a government s credit spreads may affect effectiveness assessments under the consistent critical terms and synthetic terms methods. Credit spreads can be a significant source of ineffectiveness. A methodology that does not appropriately address credit spreads may indicate for accounting purposes that a hedging relationship is effective when that conclusion is contrary to economic reality. In addition, we do not believe it is appropriate to use the consistent critical terms method for evaluating hedge effectiveness for a forecasted transaction, since it is impossible at the inception of the hedge to conclude that the critical terms match when the hedged transaction has not yet occurred. We also do not believe it is appropriate to use the consistent critical terms method to assess the effectiveness of a written swaption (see Illustrations 6 & 7), since there is no certainty at the inception of the hedge that the option will be exercised by the counterparty. If the Board feels compelled to provide hedge accounting for written options, we encourage the Board to incorporate into any final standard the same restrictions on using a written option as a hedging instrument as are included in Statement 133. Statement 133 s approach, which is based on
Page 3 symmetry of the gain and loss potential of the combined hedged position, has a stronger conceptual foundation than the approach described in the PV. The use of deferral accounting is one of the more significant differences between the PV and Statement 133. The PV proposes that changes in the fair value of an effective hedge be deferred in a government s balance sheet. We do not believe that deferred charges or deferred credits share common characteristics with other assets or liabilities that are recorded in a government s balance sheet and that are understood by constituents; therefore, we do not believe such deferrals should be recorded on a government s balance sheet. We appreciate that the cash flow hedge accounting model established by Statement 133 cannot be readily adopted by governments, because there is no concept of other comprehensive income in governmental accounting. However, we question whether the creation of a new class of asset and liability is the appropriate solution. We recommend the Board explore creating an other comprehensive income component of equity or allow direct adjustments to a government s equity for the effective portion of a cash flow hedge. For fair value hedges, we believe the change in the fair value of the derivative should be recognized in the change statement along with the change in the fair value of the hedged item attributable to the hedged risk. Implementation Concerns We observe that the accounting treatment for hybrid instruments has not been fully developed in the PV, and the PV indicates that further discussion of hybrid instruments may be included in subsequent due process documents. Our experience with Statement 133 suggests that accounting for hybrid instruments will pose significant difficulties for preparers. We encourage the Board to leverage the previous efforts of the FASB, particularly the numerous Statement 133 implementation issues that address embedded derivatives. It is our understanding that the Board s intent is to require governments to apply hedge accounting if a hedging relationship exists. We respect the Board s attempts to promote consistency in governments reporting of derivative transactions by mandating hedge accounting when hedging relationships exist (i.e., eliminating the free choice of whether to apply or not apply hedge accounting). We question, however, whether that approach is practicable based on our interpretation of other provisions of the PV. We interpret the PV as requiring a government to apply (and fail) each method for evaluating effectiveness before it can conclude that a hedging relationship does not qualify for hedge accounting. Moreover, the PV provides that if the hedgeable item is a financial asset or financial liability, it may be a hedged item with respect to the risks associated with only a portion of its cash flows or fair value. Theoretically, based on these provisions, the PV could be interpreted as requiring a preparer to analyze each of its derivatives to determine if hedge accounting should be applied (i.e., determine whether the derivative is effective in offsetting an identified risk in a hedgeable item) by performing effectiveness assessments using every possible method described in the PV for every possible proportion (or combination) of a financial asset or financial liability. Obviously the Board did not have this approach in mind; however, the extreme example raises questions about whether truly eliminating the optional nature of hedge accounting is feasable. Finally, we do not believe that the transition guidance provided in chapter 5 is practicable. The PV requires retroactive restatement of the financial statement for all prior periods presented. For a government that produces multi-year financial statements, determining whether, at the earlier reporting dates, management had a declared objective to hedge may not be possible.
Page 4 Our response to the specific questions posed in the Preliminary Views and certain other comments are discussed in the Appendix to this letter. If you have any questions concerning our comments, please contact Jim Johnson at (203) 761-3709 or Mark Bolton at (203) 761-3171. Yours truly, Deloitte & Touche LLP cc: James Johnson Michael Fritz
Page 5 Appendix Issue 1 This PV proposes that derivatives within the scope of this proposal be recognized and measured at fair value in the government s balance sheet. (See Chapter 2, paragraphs 14-16.) Do you agree with this method of reporting derivatives? Why or why not? As noted in the body of this letter, we believe that fair value is the most relevant measurement attribute for derivative instruments and agree with the proposed requirement to recognize and measure derivatives at fair value. As to the scope of the PV, we note that certain transactions that are specifically scoped out of Statement 133 appear to be within the scope of the PV. For example, Statement 133 contains an exemption for regular way security trades, while the PV is silent as to whether these should be treated as derivatives. We recommend the Board review the scope exemptions provided by Statement 133 and assess whether those exemptions are applicable to governments and should be included in a final statement. Issue 2 This PV proposes that fair value changes of derivatives used for hedging (provided that certain requirements are met) be reported in a government s balance sheet as either deferred charges or deferred credits. There would be no effect of fair value changes on the change statements. Derivatives fair value changes would be recognized on the change statement provided that the derivative is not a hedging derivative. (See Chapter 3, paragraph 1.) Do you agree with these methods of recognizing fair value changes of derivatives? Why or why not? As noted in the body of this letter, we disagree with the proposed treatment to record fair value changes of derivatives used as hedges as deferrals in a government s balance sheet. We agree that fair value changes of non-hedging derivatives should be recognized in the change statement. Issue 3 This PV proposes that hedges be evaluated for hedge effectiveness. Three general methods of evaluation are proposed consistent critical terms, synthetic instruments, and quantitative techniques. Issue 3(a) Do you believe the requirements for each of the methods is described in enough detail to be applied? Why or why not? (See Chapter 3, paragraphs 11 25.) As noted below, although we have conceptual concerns about some of the methodologies described in the PV, we believe the PV describes each method in sufficient detail to be applied to simple derivative instruments, such as a plain-vanilla swap; however, we are unsure how to apply those methods to more complex situations. For example, the PV allows for the hedgeable item to
Page 6 be a group of similar assets or liabilities (i.e., a portfolio); however, it provides no clear guidance as to what criteria must be met for the assets and liabilities to be considered similar. In addition, Chapter 3 of the PV needs to clarify whether the methodologies for evaluating effectiveness are hierarchical. Paragraph 11 of that chapter and the flowcharts provided in Appendix B seem to imply that methods for assessing effectiveness at the inception of a hedging relationship are hierarchical, and must be applied in sequence rather than at the election of the preparer. The Board should explicitly state in the final standard whether this is its intention; i.e., whether any method for assessing effectiveness may be selected by the preparer or whether those methods must be applied in a prescribed sequence. We endorse an approach that would allow a preparer to elect how it wishes to assess hedge effectiveness, and require the preparer to use that method consistently over the life of the hedging relationship. Issue 3(b) Do you agree that a hedge that meets the requirements of the consistent critical terms method should be considered an effective hedge? Why or why not? (See Chapter 3, paragraph 13.) We believe that a well defined set of criteria, when appropriately applied, can provide a practical expedient to evaluating hedge effectiveness and do not object to use of the consistent critical terms method. However, we feel that those attempting to apply the consistent critical terms method may need additional interpretive guidance similar to the guidance being requested by those who wish to apply the shortcut or matched terms methods in Statement 133. We recommend that the Board leverage the previous efforts of the FASB and monitor current discussions at the FASB regarding application of the shortcut method. We also have concerns about the PV s use of the term on or about in describing the criteria that must be met to qualify for the consistent critical terms method. Based on our experience with Statement 133, we believe the use of this undefined term will create the need for additional interpretive guidance to avoid significant diversity in practice, and could lead a preparer to assume no hedge ineffectiveness for a hedging relationship that has substantial economic ineffectiveness. We encourage the Board to require the critical terms to match exactly or define for each term a very narrow range in which deviations are acceptable. The PV proposes that consistent critical terms be assessed at inception only; however, in certain instances changes in features of the hedged item, other than those identified by the PV as being critical terms, can affect effectiveness, including the creditworthiness of the counterparty and the termination of or changes in the terms of the forecasted transaction. We believe that any final standard should require preparers to qualitatively assess, each reporting period, whether any changes in the hedged item would call into question the assumption that the hedging relationship is effective. As previously noted, we do not believe that use of the consistent critical terms method is appropriate for any forecasted transaction since the evaluation of consistent critical terms cannot be made prior to the occurrence of the transaction, as the terms are not known. We believe omission of substantive discussion of credit spreads in the PV oversimplifies the standard and may pose operational difficulties for preparers, since the examples in the PV will not reflect economic reality. For example, in the context of mirroring prepayment options, paragraph 13(f) of Chapter 3 states; When the callable bonds and a hedging swap contain these features, the fair value changes generated by the similar call options should offset. This statement ignores
Page 7 the fact that movements in a government s credit spread could cause the changes in fair value not to offset completely, which would create ineffectiveness. We are also concerned that Illustration 1 allows the consistent critical terms method to be used to assess the effectiveness of a pay-fixed, receive variable swap in hedging variable rate debt when the variable debt s interest rate is set at auction. We do not believe that the critical terms could match in this example since the credit spread, which is built into the auction rate, will potentially differ at each reset period. Issue 3(c) Do you agree that a hedge that meets the requirements of the synthetic instruments method should be considered an effective hedge? Why or why not? Do you agree that a synthetic rate that is 90 to 111 percent of the fixed rate of the swap is appropriate for evaluating hedge effectiveness of a synthetic fixed-rate instrument? Why or why not? (See Chapter 3, paragraphs 14 16.) We believe that if the criteria for consistent critical terms are not met, then a quantitative measure such as regression analysis or dollar offset is the best method to evaluate hedge effectiveness. We recommend that, in the final standard, the Board not permit use of the synthetic instrument method as a means of assessing effectiveness. If the Board does not agree with our recommendation, then we believe the final standard needs to define what substantially the same as the first interest rate means, as used in paragraph 15g(1) of Chapter 3. Failure to provide additional interpretive guidance could lead to diversity in practice. When using the synthetic method to evaluate the effectiveness of synthetic fixed-rate instruments, paragraph 15(g)(3) of Chapter 3 requires that a government, at the inception of the hedge, establish the expectation that aggregate payments have been fixed on a retrospective basis for a representative period of time. Does the Board intend for the term of the instrument to be a representative period of time as indicated in the example? We question whether it is appropriate for a retrospective analysis to use the term of the instrument if the instrument is short term, for example, two years. In order for the standard to be comprehensive, the Board needs to explain how it determined that a range of 90 to 111 percent of the fixed rate of the hedging derivative was the appropriate measure to use when evaluating hedge effectiveness of a synthetic fixed-rate instrument. The Board also should clarify why it does not require a similar quantitative assessment for synthetic variable hedges. In addition, application of this methodology means that the range of permissible ineffectiveness increases as the fixed rate of the hedging derivative increases. We do not believe that hedging instruments such as interest rate swaps become more effective in higher interest rate environments, and we question whether this effect challenges the conceptual soundness of the synthetic rate method. Issue 3(d) Do you agree that a hedge that meets the requirements of the dollar-offset method should be considered an effective hedge? Why or why not? Do you agree that the 80 to 125 percent range is appropriate for evaluating hedge effectiveness? Why or why not? (See Chapter 3, paragraphs 18 and 19.)
Page 8 We believe that a hedge that meets the requirements of the dollar offset method should be considered an effective hedge and that the range of 80 to 125 percent is appropriate for evaluating hedge effectiveness because it indicates that the hedge is achieving effective offset of changes in fair value or cash flows of the hedged item. This conclusion is based on our experience with Statement 133; however, for the final standard to be a stand-alone document, it should describe the rationale for selecting that range and provide a comprehensive dollar offset example. The final standard also should clarify whether a government s election to measure dollar offset on a period-by-period or life-to-date basis must be applied consistently. Does the Board intend for this to be a policy decision or can a government use either test in different reporting periods? The PV appears to permit the government to use the most advantageous method each reporting period. Issue 3(e) Do you agree that a hedge that meets the requirements of the regression analysis method should be considered an effective hedge? Why or why not? Do you agree that the parameters established for R-squared, the F-statistic, and the slope coefficient are appropriate for evaluating hedge effectiveness? Why or why not? (See Chapter 3, paragraphs 20 25.) We believe that a hedge that meets the requirements of the regression analysis method should be considered an effective hedge. We feel that the parameters established for R-squared, the F- statistic, and the slope coefficient are appropriate for evaluating hedge effectiveness, because they would indicate that the hedge is achieving effective offset of changes in fair value or cash flows of the hedged item. However if the Board intends for the final standard to be a stand-alone document it should provide its rationale for selecting these parameters. We also recommend that the final standard provide an appropriate parameter for the t-statistic. The final standard also should clarify whether y-intercept should be required to be zero; we believe this should be a requirement. The Board should clarify in the final standard that for regression analysis to be statistically valid, a minimum number of data points must be used. Paragraph 20 of Chapter 3 states as follows: The evaluation of effectiveness should be based on relevant historical data that consider the period of time that the swap will be effective. At inception, for example, a government that plans to enter into a four-year swap to hedge cash flows would determine the fair values of a similarly termed four-year swap and the fair values of a four-year hypothetical derivative for enough previous periods to yield statistically valid results that the hedge is expected to be either effective or not effective. Using quarterly data in the example above, a four-year swap would yield sixteen data points. We understand that many in the profession believe that a minimum of twenty eight data points is necessary for a statistically valid regression analysis, although some believe that more data points are necessary. We believe the final standard should provide guidance as to the appropriate number of data points and encourage the Board to consult with statisticians to derive the appropriate number. We also believe that the Board should provide a comprehensive regression example in the final standard.
Page 9 Issue 4 This PV describes the proposed note disclosures that would accompany the financial statements. (See Chapter 4.) The disclosure requirements of Technical Bulletin No. 2003-1, Disclosure Requirements for Derivatives Not Reported at Fair Value on the Statement of Net Assets, have been extended to derivatives within the scope of this proposal. Additional disclosures have been proposed for hedge effectiveness, hybrid instruments, and a summary of derivative activity. Do you believe that the proposed disclosures would provide essential information to understand and evaluate a government s derivative transactions and related risks? Why or why not? We believe that the proposed disclosures provide adequate information to the user to understand and evaluate the government s objectives in using derivative instruments, and the significant terms, related risks, and potential cash requirements of derivatives held by the government. We believe that presenting the disclosures of derivative instruments by category (i.e., fair value hedges, cash flow hedges, and other) and then aggregating by type (for example, receive-fixed swaps, pay-fixed swaps, swaptions, rate caps, basis swaps or futures contracts) is appropriate. The FASB is currently undertaking a project to improve disclosures about derivatives. We encourage the Board to monitor the FASB s project and consider incorporating the revised disclosure requirements into the final standard to promote conformity in derivative reporting. Issue 5 This PV proposes that the amount of hedge ineffectiveness be disclosed. This disclosure would be limited to hedges that are evaluated using the synthetic fixed-rate, dollar offset, or regression analysis methods. (See Chapter 4, paragraph 11.) Do you agree that the amount of hedge ineffectiveness should be disclosed as required by this PV? Why or why not? We agree that the disclosure of hedge ineffectiveness is appropriate. However, as previously discussed, we believe the hedge ineffectiveness should be recognized in the government s statement of changes in the period the ineffectiveness occurs. Issue 6 This PV proposes that when a swap is entered into and an upfront payment is received, a liability should be recognized for the upfront payment and should be separated from the swap. (See Chapter 2, paragraphs 10 13). Do you agree with this treatment of an upfront payment? Why or why not? The PV does not differentiate between an upfront payment for a forward contract and an upfront payment for a written option contract. We do not believe an upfront payment for a written option is always indicative of a financing transaction. Unlike a forward contract, where performance is expected to occur, performance on an option contract is less assured and is at the discretion of the counterparty to the contract. Furthermore, we believe that the implications of paragraph 11 are inconsistent with the characteristics of a derivative in Chapter 2 of the PV. Paragraph 11 states:
Page 10 A hybrid instrument may be established when a derivative contains a financing element. Derivatives contain a financing element and hence, a companion instrument when there is an upfront payment. A liability should be reported when a government receives an up-front payment. The derivative should be reported separately from the companion instrument and measured at fair value. One of the characteristics of a derivative is leverage. Leverage is defined in paragraph 1(b) of chapter 2 as It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. Thus, a contract that possesses the other characteristics of a derivative described in paragraph 1, and that requires an initial net investment that is smaller than what would be required for other types of similar contracts would be considered a derivative in its entirety according to paragraph 1, but would be considered a hybrid instrument according to paragraph 11. The Board should reconcile these definitions in its final standard. If a final standard retains the concept that different components of a derivative contract should receive separate accounting treatment based on their characteristics, it also should address how to account for contracts that contain multiple derivatives. Statement 133 has been interpreted as not allowing an entity to account separately for more than one embedded derivative feature embedded in a single hybrid instrument (Statement 133 Implementation Issue No. B15). We do not believe that the upfront payment in a swaption contract should be bifurcated between a financing element and the time value of the option. If the Board determines that this guidance should be retained, we believe Illustrations 6 and 7, which provide examples of calculating the allocation of proceeds, need to be modified. In these illustrations, BMA was used as the discount rate in the calculation to bifurcate the up-front cash payment between the financing portion and that portion that represents the fair value of the option at inception. The illustration states that BMA was used to simplify the calculation; however, we believe that the use of BMA as the discount rate is inappropriate, and by using BMA in the illustrations, the Board might establish an unintended precedent. We believe the appropriate discount rate would be LIBOR, or some other risk free-rate used by taxable entities. This is because the cash payment made by the counterparty was most likely priced using a taxable discount rate, as the transaction is not tax free to the counterparty. We believe that the allocation difference caused by using the lower tax free rate (BMA) versus a taxable rate (LIBOR) could be significant. In the Illustrations, we estimate that as a result of using BMA as the discount rate, approximately $1.5 million (13 percent) more was allocated to the financing element. Other Comments Chapter 2 Definition and Measurement It is our understanding that the final standard would apply to all derivative instruments within its scope; however, it appears that much of the PV was written with a bias towards interest rate swaps. Because the proposed definition of derivatives is based on characteristics rather than
Page 11 derivative type, we believe that the final standard should be neutral to the type of derivative throughout. Paragraph 1(c) uses the phrase not substantially different which is very broad and subject to much interpretation. The Board should clarify the meaning of this term. The definition of reference rate in the glossary is not as comprehensive as the discussion of reference rates in paragraph 2 of Chapter 2 of the PV. The Board should ensure that the definition included in the glossary conforms to the description in paragraph 2. The description of reference rate in paragraph 2 is similar to Statement 133 s definition of underlying. If the Board does not intend for there to be any significant differences in the definition, we recommend the Board adopt the term underlying, since that term is readily understood in current practice. In addition, paragraph 2 notes that a reference rate can be an exchange rate or exchange rate index. We recommend that the Board expand the final standard to discuss foreign currency derivatives and foreign currency hedging. Paragraph 4 states the following: Many derivative instruments require no initial net investment. Some require an initial net investment as compensation for time value of money (for example, a premium on an option) or for terms that are more or less favorable than market condition. We suggest deleting the words of money when explaining the initial net investment of an option because the premium of an option contemplates more that just the time value of money most notably, down-side protection of not holding the asset or liability itself. We believe that terms closely related and unrelated transactions in paragraph 12(a) require additional interpretive guidance to avoid diversity in practice. Embedded derivatives have been source of much confusion under Statement 133. Since the separation/separate accounting requirement provisions of the PV are similar to Statement 133, governments may raise similar questions in practice, and we encourage the Board to leverage the previous efforts of the FASB. Chapter 3 Hedging and Hedge Accounting Paragraph 2 lists requirements that need to be met for a hedge to occur, including management s declared objective is to establish a hedge. However, footnote 1 states that this proposal does not prescribe documentation requirements. We question whether this accounting model will be functional absent any specified documentation requirements or interpretations of what constitutes a declared objective. For example, if a government makes a broad statement in its annual report that it uses derivatives solely to manage risk, would that constitute a declared objective to hedge? The Board should clarify how the phrase considering the offsetting changes in fair values or cash flows between the hedging derivative and the hedgeable item in their entirety in paragraph 6 reconciles with paragraph 8 which states that if the hedgeable item is a financial asset or financial liability, it may be a hedged item with respect to the risks associated with only a portion of its cash flows or fair value.
Page 12 Paragraph 8(b) uses the phrases similar assets or similar liabilities and share the same hedged risk exposure, which are very broad and subject to much interpretation. The Board should clarify the meaning of these phrases and consider providing quantitative guidelines similar to those provided in Statement 133. Paragraph 8(c) of the PV describes the characteristics of an expected transaction but does not indicate that the transaction must be probable of occurring. Did the Board intend for this guidance to differ from that included in Statement 133? We believe inconsistencies in application may arise if the Board does not establish some minimum probability threshold for these transactions. Also, paragraph 8(c) is inconsistent with paragraph 27(b), which indicates that one termination event is when the likelihood of an expected transaction occurring is no longer probable. We believe that a probable threshold is appropriate. Paragraph 9 states: If, however, the hedged item is reported at fair value in a government s balance sheet, the Board believes that changes in fair value of the hedging derivative should be reported in the change statements in the current period. [Emphasis added] The term hedging should be deleted, as the derivative does not meet the criterion in paragraph 2(c) because assets and liabilities measured at fair value are not hedgeable items as described in paragraph 8. Paragraph 28 discusses when to take the deferral account off the books after a hedge is terminated. The examples used in this paragraph suggest that if a government s reexposure to risk is significant after the termination of a hedge, but prior to the occurrence of the hedged transaction, it would be appropriate to recognize the deferred amounts associated with the hedge in the government s change statements. The practice differs from the guidance in Statement 133, which states that amounts deferred would not be recognized until the hedged transaction occurs. Did the Board intend for this difference to exist? If so, it may want to amplify its discussion of its rationale in this paragraph. We believe the standard should describe each circumstance that causes the deferral to be removed, and provide examples.