NetLoan - Setting Up Cash Flow Hedge Accounting Swaps

Overview

This article shows how to configure an interest rate swap that converts a variable-rate loan to a fixed effective rate, using three NetLoan loans. Once set up, NetLoan accrues each leg of the swap and nets the interest activity in your GL, leaving only the periodic fair value remeasurement to be posted by hand. This is a setup performed when entering a new swap, not a one-time global configuration. For the month-to-month bookings after setup, see the companion ongoing-operations article linked at the end.

Supported Functionality

Only cash flow hedges for which you elect hedge accounting can be entered into NetLoan.

A cash flow hedge is the correct model only when you are hedging a floating exposure, which is the case here. A swap used to protect a fixed-rate loan would instead be a fair value hedge with different mechanics, and is out of scope

Note that NetLoan is not a hedge accounting tool and that anything outside of this scenario will need to be handled outside of NetLoan. Our consultants are not hedge accounting experts and can not provide guidance on how to maintain these loans. Your team is responsible for maintaining and verifying that you are accounting for your swaps in accordance with the prevailing guidance in your area.

Background

Cash Flow Hedges & Interest Rate Swaps

An interest rate swap is an agreement between two parties to exchange interest payment streams. In a pay-fixed / receive-floating swap, you pay the counterparty a fixed rate and receive a floating rate in return. No principal is exchanged; only the net interest difference settles each period.

The problem it solves: a company with floating-rate debt (for example, SOFR + 2%) wants predictable interest expense. The fix is to keep paying the floating rate to the lender, receive that same floating rate back from the swap counterparty (which offsets the debt payment), and pay the counterparty a fixed rate instead. The net result is a fixed all-in interest cost.

Example

Debt of $1M at SOFR + 2% (currently 7% all-in), hedged with a swap to pay 7% fixed and receive SOFR + 2%:

Pay bank: SOFR + 2%
Receive from swap: SOFR + 2% (offsets the bank payment)
Pay to swap: 7% fixed
Net cost: 7% fixed

Under cash flow hedge accounting (ASC 815, post ASU 2017-12), the swap is carried at fair value, but the effective-portion fair value changes are deferred in OCI (equity) and reclassified into interest expense in the same periods the hedged interest payments are recognized. Reported interest expense therefore stays a smooth, fixed rate regardless of where floating rates move. In the illustrative $10M model, net interest expense is a flat 7.00% of notional every quarter across a full rate cycle, and ending AOCI ties exactly to the swap's fair value each period (a perfectly effective hedge).

Prerequisites

Standard NetLoan access with permission to create and configure loan records.
A NetSuite role able to create the GL accounts used by the swap legs (asset, expense, and other-current-liability accounts described below).
The economic terms of the swap confirmed: notional, fixed rate, the floating index and spread, settlement frequency, and the counterparty.
A source for the periodic fair value of the swap, typically the counterparty's valuation or your own model.

Important Considerations

NetLoan does not compute swap fair value. This is a workaround that requires manual entries for entries beyond the capabilities of NetLoan.
This setup is performed at implementation and per swap when setting up a new loan, not as a global feature toggle.

Setup Guide

The Three-Loan Structure

Model the arrangement with three separate NetLoan loans, plus manual journals for fair value:

Loan	Represents	Entity Type	Rate	Payment Type
Loan 1	The actual bank debt	Borrower	Floating (variable)	Per the debt agreement
Loan 2	Swap floating leg, what is received	Lender	Floating (variable)	Interest only
Loan 3	Swap fixed leg, what is paid	Borrower	Fixed	Interest only

Loans 2 and 3 share the same settlement account and the same net interest account so their activity offsets in the GL and only the true net settlement remains. Fair value adjustments are posted manually outside NetLoan.

Tip for Success

There are scenarios where you might have more than one interest rate swap on a single loan. In those cases you will need to create new Loan 2 and Loan 3 for each individual swap in the amount of the swap.

Loan 1: bank debt

A regular borrower loan to the bank. No special account mapping is required. Configure it exactly as you would any other floating-rate borrower loan, using the rate and payment terms from the debt agreement.

Example Header Selections (Loan 1)

Example Interest Rates (Loan 1)

Example Schedule (Loan 1)

Loan 2: Swap Floating Leg (Received)

Set up as a Lender loan at the floating rate, interest only.

Loan Type Settings (Loan 2)

Map the account fields on the loan type specific to loan 2 (the floating leg of the swap) as follows:

Account Field	Maps To	Account Type	Field ID
Non-Current Note Receivable	Swap Settlement Account	Asset	custrecord_da_type_noterecnoncurrent
Interest Income	Swap Interest Expense	Expense	custrecord_da_type_interestincome
Accrued Interest	Swap Accrued Interest Expense	Other Current Liability/ Other Current Asset	custrecord_da_type_accrued_interest_rec

Example Entity Setting (Loan 2)

Example Account Mapping (Loan 2)

Loan Settings (Loan 2)

Create the loan with the follwoing characteristics:

Loan Setting	Value
Rate	Floating rate (variable), matching the swap's floating index plus spread
Payment type	Interest only

Loan 2 Mirrors Floating Rate

The notional, floating index, and spread on Loan 2 must mirror the hedged debt on Loan 1 so the floating leg offsets the verying interest cash flow.

Example Header Selections (Loan 2)

Example Interest Rates (Loan 2)

Example Payments (Loan 2)

Example Schedule (Loan 2)

Loan 3: Swap Fixed Leg (Paid)

Set up as a Borrower loan at the fixed swap rate, interest only.

Loan Type Settings (Loan 3)

Map the account fields on the loan type specific to the floating leg of the swap as follows:

Account Field	Maps To	Account Type	Field ID
Long-Term Liability	Swap Settlement Account	Asset	custrecord_da_type_longtermliability
Interest Expense	Swap Interest Expense	Expense	custrecord_da_type_interestexpense
Accrued Interest	Swap Accrued Interest Expense	Other Current Liability/ Other Current Asset	custrecord_da_type_accrued_interest_rec

Example Entity Setting (Loan 3)

Example Account Mapping (Loan 3)

Loan Settings (Loan 3)

Create the loan with the follwoing characteristics:

Loan Setting	Value
Rate	Fixed rate (the swap's pay-fixed rate)
Payment type	Interest only

Automatic Netting & Settlement of Residual

Because Loan 2 and Loan 3 point at the same Swap Settlement Account and the same Swap Interest Net account, their accruals net on their own: when the legs are equal, the accounts zero out, and when they differ, the residual balance is exactly the net amount to settle in cash.

Example Header Selections (Loan 3)