FASB votes to finalize hedge accounting standard

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The Financial Accounting Standards Board voted Wednesday to proceed to a final standard on hedge accounting, part of the financial instruments project that FASB had been working on for years with the International Accounting Standards Board before the two boards went their separate ways.

FASB anticipates issuing the final hedging standard in August. The new standard aims to present the economic results for hedge accounting in a more transparent way, on the face of the financial statements as well as in the footnotes, for investors and analysts. Hedge accounting would be expanded for both financial risks (such as interest rates) and commodity risks.

The new standard will take effect for fiscal years, and interim periods within those fiscal years, starting after Dec. 15, 2018, for public companies and for fiscal years beginning after Dec. 15, 2019 (and interim periods for fiscal years beginning after Dec. 15, 2020), for private companies. FASB is allowing early adoption in any interim period or fiscal years before the effective date.

FASB has received a great deal of feedback on the standard. It issued an exposure draft last September that generated 60 comment letters (see FASB proposes changes in hedge accounting standards). The board also held discussions with investors and other users of financial statements, and hosted two public roundtable meetings, which included participation from preparers, regulators, auditors and other constituents.

“Over the past year, the FASB has received overwhelmingly positive feedback on the proposed changes to the hedge accounting model from both companies and investors,” said FASB Chairman Russell G. Golden in a statement. “The resulting standard will better align the accounting rules with a company’s risk management activities, better reflect the economic results of hedging in the financial statements, and simplify hedge accounting treatment.”

Stakeholders have told FASB over the years the hedge accounting requirements in current U.S. GAAP sometimes don’t allow an entity to properly recognize the economic results of its hedging strategies in its financial statements. They argued improvements to the hedge accounting model were needed to facilitate financial reporting that more closely reflects an entity’s risk management activities. Stakeholders also told FASB the effect of hedge accounting on an entity’s reported results often is difficult to understand and interpret. They stressed that the reported results should help financial statement users better understand an entity’s risk exposures and how hedging strategies are being used to manage those exposures.

FASB also wanted to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements as well as make targeted improvements to simplify the application of the hedge accounting guidance under current GAAP.

The IASB released its own financial instruments standard, IFRS 9, in 2014, which includes hedging standards, while FASB released separate accounting standards updates for recognition and measurement of financial instruments and for credit losses last 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).

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