Equity Swap Transaction Accounting Rules

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Equity swaps are a form of derivative. Equity swaps are treated as assets and liabilities under accounting rules. The value is based on the fair-market value of the derivative. Losses on equity swaps and derivatives cannot be deferred to another accounting period. The Financial Accounting Standards Board, or FASB, has created accounting requirements for equity swaps and derivatives.

Fair-Market Value

  • Accountants must obtain the current fair-market value. This can be done through the LIPOR market index for derivatives. A stock broker can price equity swaps to the current market value in addition to using the LIPOR average. The type of equity swap package can be compared to the values of other comparable equity swap packages. Use the average as fair-market value for the equity swap.

Record-Keeping

  • Any change must be recorded in the financial ledger. For an increase in value, the increase is added to the value of the equity swap on the asset side of the ledger. A loss is subtracted as a liability from the value of the equity swap. Revaluation can be done quarterly, biannually or yearly. Some states require revaluation at specified intervals. The state-level department of taxation can provide specifics for revaluation timeframes.

Financial Reports

  • Accountants must create the financial reports. Income statements, balance sheets and other financial statements must show gains and losses from the equity swap investment. Gains and losses must be represented in the reports immediately following revaluation in the equity swap. Financial reports are made available to stockholders and investors. Financial reports are provided with corporate income tax filings. The statements must separate equity swap losses and gains from operating losses and gains.

Sale of Equity

  • The company must find a buyer and transfer the equity swap to the new owner for an agreed-upon price. The accountant records the sale as a credit to the asset column. The purchase price is a debit to the asset column of received income on investments. A gain on the sale is recorded as a debit to the received from investment entry. A loss on the sale is recorded as a credit to the same entry.

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