Course : Financial Management (PT - MSc ISFM)

As regards to yesterday’s question on the accounting treatment of the Interest Rate Swap (IRS) cash flows, it depends on how the IRS is used. As a general rule, the IRS should be recognized on the balance sheet as a derivative asset or liability and measured at fair value (Mark-to-Market).
We start at a zero fair value and every time that a report is prepared, we record the change in the fair value of the IRS. If the IRS is used for hedging the effective % of the swap (i.e. the portion of the hedge) is initialy recorded in the “Other Comprehensive Income” item rather than the income statement. The rest is recorded in P&L.
This is a more technical accounting issue and is beyond the scope of our introductory course in Financial Management.

If you need further and more detailed references on the issue check IFRS, 9 which presents how corporations should classify and measure financial assets and liabilities, and various contracts.

Best regards,

Spyros