FASB clarifies hedge accounting standard

The Financial Accounting Standards Board released a proposed accounting standards update Tuesday aimed at clarifying some areas of its 2017 hedging standard for derivatives.

“During our outreach to help stakeholders understand and implement the new hedging standard, we identified areas of the guidance that could be better aligned with the standard’s stated objectives,” said FASB Chairman Russell G. Golden in a statement. “The proposed ASU would address these areas and help promote a better, more consistent application of the standard.”

The proposal mainly addresses the change in hedged risk in a cash flow hedge. FASB’s 2017 guidance permitted the risk causing variability in cash flows of the forecasted transaction to change (for example, from one variable interest rate to another variable interest rate, or from one commodity index to a different index for the same commodity) if certain criteria are met.

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Microsoft corporate controller Alice Jolla interviewing FASB chairman Russell Golden at Financial Executives International's Current Financial Reporting Insights conference in New York.

The proposed update would clarify whether that change could happen both prospectively (that is, before the forecasted transaction occurs) and retrospectively (that is, after the forecasted transaction occurs) and, if so, how hedge accounting guidance should be applied in those situations.

The proposed accounting standards update and a FASB In Focus overview are available at www.fasb.org. FASB is asking for comments on the proposed accounting standards update by Jan. 13, 2020.

FASB recently voted to defer the effective date for the hedging and leases standard for private companies and nonprofits from January 2020 until January 2021. Golden spoke about the deferral of those and other major standards during Financial Executives International’s Current Financial Reporting Insights conference in New York on Monday. He mentioned that he would have liked to have a Transition Resource Group available for the leases standard to deal with questions about the new standard, as there was for the revenue recognition and current expected credit losses (CECL) standard.

“I don’t have any one particular technical change that I think the Transition Resource Group would have helped us identify earlier,” he later said during a press conference. “I just believe that our stakeholders realize the value of a Transition Resource Group. We saw that in revenue, we see that in CECL, and I think our stakeholders have convinced me that it would have been a best practice to have done that on leases.”

He was also asked about all the changes at the FASB and its sister organization, the Governmental Accounting Standards Board, as his term and GASB Chairman David Vaudt’s terms are scheduled to end next June. “Dave and I are committed to a high-quality transition plan whenever the two board chairs of the FASB and the GASB are appointed,” said Golden. “It’s commonplace at the FASB to transition new board members. We have that process in place, so we expect we will have a quality transition.”

He noted that FASB’s acting technical director, Shayne Kuhaneck, regularly briefs new board members about FASB’s current projects. “For example, Shayne and his team, whenever a new board member comes into place, they start and educate the new board member on all of the active projects, where the projects started, and where the projects are, so they can hit the ground running,” said Golden. “That is why oftentimes they’re named well before their effective start date as seated board members.”

Kuhaneck described several of those projects at the FEI CFRI conference to the attendees, including FASB’s decision to defer the effective dates of the hedging, CECL, leases and long-duration insurance contract standards, especially for private companies, nonprofits and small reporting companies.

“Our research and our interactions with stakeholders indicated that implementation challenges are often far more significant for private companies, smaller public companies and not-for-profit organizations,” said Kuhaneck. “Access to resources, education and technology varies considerably among organizations of different sizes, and the board did not want those hurdles to block the path toward a successful implementation. We also observed that private and smaller public companies can learn a lot from the experiences of larger public companies. More time between effective dates means more learning. We also learned it’s more cost effective to take an integrated, holistic approach that coordinates accounting changes with the other changes needed to run a successful business, or what some refer to as a business approach to adopting accounting changes.”

FASB is expected to issue the formal guidance on the date deferral on Friday for many of those standards.

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