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VII. FNBC’s Financial Accounting Practice
During the relevant years, FNBC’s financial accounting
practice with respect to the pricing and valuation of commodity
swaps, currency swaps, and combination swaps did not differ
significantly from its financial accounting practice with respect
to interest rate swaps. FNBC used a three-step process to
determine the value of its swaps for financial accounting
purposes. First, on a swap-by-swap basis, FNBC generally
calculated each swap’s midmarket value (usually from the Devon
system but sometimes from the midmarket swap curve) and
recalculated these midmarket values daily. Second and third,
FNBC calculated credit and administrative costs adjustments as to
the swaps. FNBC’s administrative costs adjustments (which were
computed on a portfolio basis) included an adjustment for hedging
and may have included an adjustment for funding and cost of
capital. FNBC did not take an adjustment for the cost to close
out (liquidate) its swaps.
VIII. FNBC’s Practice as to Its Valuation of Its Swaps
A. Financial Reporting Position
The 1993 Annual Report of FNBC and its parent FCC described
their accounting policy for financial derivative instruments as
follows:
Accounting for Derivative Financial Instruments
Derivative financial instruments used in trading and
venture capital activities are valued at prevailing
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