FASB Proposes Changes in Hedge Accounting Standards

Register now

The Financial Accounting Standards Board proposed improvements Thursday in the accounting guidance for hedging activities.

The proposed accounting standards update is part of the financial instruments project that FASB has been working on with the International Accounting Standards Board for converging U.S. GAAP with International Financial Reporting Standards. The IASB has released its own financial instruments standard, IFRS 9, in 2014, while FASB has been rolling out separate accounting standards updates for recognition and measurement of financial instruments and for credit losses this year, which differ in some respects from the IFRS versions (see FASB Issues Standard for Financial Instruments Recognition and Measurement and FASB Releases New Financial Instruments Standard on Credit Losses).

The hedging standards are the latest component, although they are not yet finalized like the other two standards. FASB is asking for comments on the exposure draft of the proposed accounting standards update on hedging activities by Nov. 22, 2016.

FASB reactivated the hedge accounting project in 2014 after issuing two exposure drafts in 2008 and 2010 and receiving feedback on them. The latest exposure draft proposes to improve how the economic results of an institution’s risk management activities are shown in several ways. It would expand the use of component hedging for both nonfinancial and financial risks, and refine the measurement techniques for hedged items in fair value hedges of benchmark interest rate risk.

The update would also eliminate separate measurement and reporting of hedge ineffectiveness. It would require for cash flow and net investment hedges that all changes in the fair value of the hedging instrument that are included in the hedging relationship be deferred in other comprehensive income and released to the income statement in the period or periods when the hedged item affects earnings.

The accounting standards update would also require changes in the fair value of hedging instruments to be recorded in the same income statement line item as the earnings effect of the hedged item. It would require enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items.

In addition, the exposure draft includes some proposals to simplify the application of hedge accounting, for example, by providing more time for the completion of initial quantitative assessments of hedge effectiveness. It would allow subsequent assessments of hedge effectiveness to be done on a qualitative basis when an initial quantitative test is required. It would also clarify the application of the critical terms match method for a group of forecasted transactions. The update would permit an institution that opts for the shortcut method to continue hedge accounting by using a “long-haul” method to assess hedge effectiveness if use of the shortcut method was not or no longer is appropriate after hedge inception.

FASB acknowledged that the language used to describe the hedge accounting guidance in the proposed accounting standards update differs from IFRS 9, but it expects that many common hedge accounting strategies will have similar outcomes.

The proposed update and IFRS 9 provide similar methodologies for measuring the hedged item in a partial-term fair value hedge of interest rate risk. The proposed update would allow qualitative assessments of hedge effectiveness if certain conditions are met, while IFRS 9 allows for either quantitative or qualitative assessment of hedge effectiveness.

However, there are some differences between FASB’s proposed ASU and IFRS 9 pertaining to the presentation of changes in the fair value of hedging instruments. FASB’s proposed amendments would eliminate the concept of hedge ineffectiveness, while IFRS 9 retains that concept. FASB’s proposed changes would require an institution to record the entire change in the fair value of the hedging instrument in the same income statement line item as the earnings effect of the hedged item, while IFRS 9 does not provide broad guidance on presentation.

To get more feedback on its proposals, FASB has tentatively scheduled two public roundtable meetings at its offices in Norwalk, Conn., on Friday, Dec. 2, 2016. People who are interested in participating in one of the roundtables are asked to submit written comments on the proposals by Friday, Nov. 4, 2016.

FASB plans to decide on an effective date for the update after redeliberates about all the comments gets during the comment period and from the public roundtable meetings. Early application of the proposed amendments would be allowed at the beginning of any fiscal year before the effective date.

FASB has provided more information about the proposed accounting standards update, including a FASB in Focus overview document. The board also plans to host a CPE webcast at 1:00 p.m. EDT on Monday, Oct. 17, 2016. Registration for the webcast will be announced on the FASB website in the weeks ahead.

For reprint and licensing requests for this article, click here.
Audits Financial reporting Accounting standards