FASB proposal would improve hedge accounting, AICPA committee says

By Ken Tysiac

A FASB proposal for targeted improvements to accounting for hedging activities would simplify and improve the current model, according to a comment letter sent Monday by the AICPA Financial Reporting Executive Committee (FinREC).

In an effort to improve the hedge accounting model, FASB on Sept. 8 issued Proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

According to FinREC, changes to the current standard are needed because the standard is challenging for reporting entities to apply, and because it is difficult to achieve hedge accounting for financial and nonfinancial risks under the current guidance.

FinREC wrote that FASB’s proposal would:

  • Improve and simplify the hedge accounting model.
  • Better reflect the economics of risk management activities.
  • Ease hedge documentation requirements.

The current proposal also addresses many of the concerns FinREC raised in a comment letter responding to a previous proposal FASB issued in 2010.

FinREC did question some of the items in the new proposal, including:

  • FASB’s decision to prohibit entities from using the benchmark rate component of the contractual coupon cash flows to calculate the change in the hedged item’s fair value attributable to changes in the benchmark interest rate when the current market yield of the hedged item is less than the benchmark interest rate at the inception of the hedge. “The board’s reasons for imposing this limitation are not clear to us,” FinREC wrote.
  • FinREC believes FASB has an opportunity to simplify and improve the guidance regarding the implications of missed forecasts and whether they should be considered as contributing to a pattern of such activity.
  • A disclosure that would describe quantitative hedge accounting goals that an entity sets when developing its hedge accounting objectives and strategies—and whether it met those goals. FinREC wrote that this disclosure would be onerous for entities that have multiple types of hedges and varying objectives and strategies.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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