# interest rate swap accounting question

If you have an interest rate swap (notional \$100k) and you are a fixed rate receiver of say 7% interest rate and you pay libor. For simplicity your loan is also on libor. That means your net interest payable is effectively 7%.  Assume libor is 8%.

For accounting purposes, you will record the loan interest of libor of 8% and does the value of the swap has to equal the 1% of \$100k. I understand the value of swap is the present value of CF (fixed) - CF (floating). But shouldn’t this sum up to 1% im getting from the counterpart so that the effective interest is net 7%.

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per IFRS9 ,

in short netting is possible under IFRS9 - the aggregated exposure (that is, a combination of the debt instrument plus the interest rate swap) is eligible to be designated as the hedged item, without needing to de –designate the original interest rate hedge.

In general changes in the fair value of the hedging instrument are recognized in OCI. The ineffective portion of the  change in the fair value of the hedging instrument (if any) is recognized directly in P&L.
The amount recognized in OCI should be the lower of:
• The cumulative gain or loss on the hedging instrument from the inception of the hedge, and
• The cumulative change in the fair value (present value) of the expected cash flows on the hedged item from
the inception of the hedge.

Hedge is ineffective if f the cumulative change in the hedging instrument exceeds the change in the hedged item

R

Brah!

#1 You are assuming a forward curve to value your swap ( 3mon libor + spread) vs fix rate

#2 If you present value both sides

#3 If lets say the net value is negative -50k.  So you have a liability.  If its +50k, you have an asset.

#4 the value is so small to run a credit valuation adjustment.