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These excerpts taken from the AYR 10-K filed Mar 2, 2009. Derivative
Financial Instruments
In the normal course of business we utilize derivative
instruments to manage our exposure to interest rate risks. We
account for derivative instruments in accordance with Statement
of Financial Accounting Standards, or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended and interpreted, or
SFAS No. 133. In accordance with
SFAS No. 133, all derivatives are recognized on the
balance sheet at their fair value. We determine fair value for
our United States dollar denominated interest rate swaps by
calculating reset rates and discounting cash flows based on cash
rates, futures rates and swap rates in effect at the period
close. We determine the fair value of our United States dollar
denominated guaranteed notional balance interest rate swaps
based on the upper notional band using cash flows discounted at
relevant market interest rates in effect at the period close.
Table of Contents
When hedge treatment is achieved under SFAS No. 133,
the changes in fair values related to the effective portion of
the derivatives are recorded in other comprehensive income on
our consolidated balance sheet. The ineffective portion of the
derivative contract is calculated and recorded in interest
expense on our consolidated statement of income at each quarter
end. For any interest rate swap not designated as a hedge under
SFAS No. 133, all mark-to-market adjustments are
recognized in other income (expense) on our consolidated
statement of income.
At inception of the hedge, we choose a method to assess
effectiveness and to calculate ineffectiveness, which we must
use for the life of the hedge relationship. Historically, we
have designated the “change in variable cash flows
method” for calculation of hedge ineffectiveness. This
calculation, only available for swaps designated at execution,
involves a comparison of the present value of the cumulative
change in the expected future cash flows on the variable leg of
the swap against the present value of the cumulative change in
the expected future interest cash flows on the floating-rate
liability. When the change in the swaps variable leg exceeds the
change in the liability, the calculated ineffectiveness is
recorded in interest expense on our consolidated statement of
income. Effectiveness is tested by dividing the change in the
derivative variable leg by the change in the liability.
We use the “hypothetical trade method” for hedge
relationships designated after execution that did not qualify
for the “change in variable cash flow method” under
SFAS No. 133. We are increasingly designating the
“hypothetical trade method” for all new hedge
relationships. The calculation involves a comparison of the
change in the fair value of a swap to the change in the fair
value of a hypothetical swap with critical terms that reflect
the hedged debt. When the change in the swap exceeds the change
in the hypothetical swap, the calculated ineffectiveness is
recorded in interest expense on our consolidated statement of
income. The effectiveness of these relationships is tested by
regressing historical changes in the swap against historical
changes in the hypothetical swap.
Derivative Financial Instruments In the normal course of business we utilize derivative instruments to manage our exposure to interest rate risks. We account for derivative instruments in accordance with Statement of Financial Accounting Standards, or SFAS, No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, or SFAS No. 133. In accordance with SFAS No. 133, all derivatives are recognized on the balance sheet at their fair value. We determine fair value for our United States dollar denominated interest rate swaps by calculating reset rates and discounting cash flows based on cash rates, futures rates and swap rates in effect at the period close. We determine the fair value of our United States dollar denominated guaranteed notional balance interest rate swaps based on the upper notional band using cash flows discounted at relevant market interest rates in effect at the period close.
Table of ContentsWhen hedge treatment is achieved under SFAS No. 133, the changes in fair values related to the effective portion of the derivatives are recorded in other comprehensive income on our consolidated balance sheet. The ineffective portion of the derivative contract is calculated and recorded in interest expense on our consolidated statement of income at each quarter end. For any interest rate swap not designated as a hedge under SFAS No. 133, all mark-to-market adjustments are recognized in other income (expense) on our consolidated statement of income. At inception of the hedge, we choose a method to assess effectiveness and to calculate ineffectiveness, which we must use for the life of the hedge relationship. Historically, we have designated the “change in variable cash flows method” for calculation of hedge ineffectiveness. This calculation, only available for swaps designated at execution, involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable leg of the swap against the present value of the cumulative change in the expected future interest cash flows on the floating-rate liability. When the change in the swaps variable leg exceeds the change in the liability, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. Effectiveness is tested by dividing the change in the derivative variable leg by the change in the liability. We use the “hypothetical trade method” for hedge relationships designated after execution that did not qualify for the “change in variable cash flow method” under SFAS No. 133. We are increasingly designating the “hypothetical trade method” for all new hedge relationships. The calculation involves a comparison of the change in the fair value of a swap to the change in the fair value of a hypothetical swap with critical terms that reflect the hedged debt. When the change in the swap exceeds the change in the hypothetical swap, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. The effectiveness of these relationships is tested by regressing historical changes in the swap against historical changes in the hypothetical swap. This excerpt taken from the AYR 8-K filed Sep 26, 2007. Derivative Financial Instruments In the normal course of business we utilize derivative instruments to manage our exposure to interest rate risks. We account for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (“SFAS No. 133”). In accordance with SFAS No.133, all derivatives are recognized on the balance sheet at their fair value. We obtain the values on a quarterly basis from the counterparty of the derivative contracts. When hedge treatment is achieved under SFAS No.133, the changes in fair values related to the effective portion of the derivatives are recorded in other comprehensive income or in income, depending on the designation of the derivative as a cash flow hedge. The ineffective portion of the derivative contract is calculated and recorded in income at each quarter end.
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At inception of the hedge, we choose a method of ineffectiveness calculation, which we must use for the life of the contract. For a majority of our hedges, we use the “change in variable cash flows method” for calculation of hedges not considered to be perfectly effective. In the case of swap transactions, the calculation involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable leg of the swap and the present value of the cumulative change in the expected future interest cash flows on the floating-rate liability. The difference is the calculated ineffectiveness and is recorded in income. We use the “hypothetical trade method” for hedges that do not qualify for the “change in variable cash flow method” under SFAS No.133. The calculation involves a comparison of the change in the fair value of a hypothetical trade to the change in the fair value of the hedge. The difference is the calculated ineffectiveness and is recorded in income. | EXCERPTS ON THIS PAGE:
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