In January 2014, the FASB released Accounting Standard Update 2014-03 Derivatives and Hedging (Topic 815): Accounting for Certain Receive – Variable, Pay – Fixed Interest Rate Swaps (ASU 2014-03). ASU 2014-03 is the second standard issued by the FASB upon endorsement of a consensus of the Private Company Council that is specifically designed to meet the needs of private companies by providing an alternative within US GAAP.
Companies that are unable to borrow at fixed rates often rely on variable-rate debt combined with an interest rate swap. In effect, they receive variable rates and pay fixed rates. The net effect is similar to borrowing at fixed rates. But the accounting and disclosure requirements are considerably more complex when an interest rate swap is involved.
Current accounting standards require companies to recognize all their derivative instruments (including interest swaps) on their balance sheets as assets or liabilities and to measure them at fair value. The standards allow companies to mitigate the income statement effect of any swings in fair value attributable to interest rate risks by applying an accounting method known as "cash flow hedge" accounting. This technique has the effect of presenting interest expense in the income statement as if the company had a fixed rate debt. But some entities, especially private companies, have expressed concerns about the practical difficulties involved in applying the current standards.