FASB proposes targeted changes to hedge accounting rules

By Ken Tysiac

FASB proposed targeted changes to hedge accounting standards Thursday that are designed to help financial statements provide an accurate depiction of how an organization manages risk.

The board proposed that the economic results of an institution’s risk management activities would be portrayed more faithfully by:

  • Expanding the use of component hedging for nonfinancial and financial risks.
  • Refining the measurement techniques for hedged items in fair value hedges of benchmark interest rate risk.
  • Eliminating the separate measurement and reporting of hedge ineffectiveness.
  • Requiring for cash flow and net investment hedges that all changes in fair value of the hedging instrument 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.
  • Requiring that changes in the fair value of hedging instruments be recorded in the same income statement line item as the earnings effect of the hedged item.
  • Requiring enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items.

“Stakeholders shared concerns that current hedge accounting requirements do not faithfully portray the economic results of an institution’s risk management activities,” FASB Chairman Russell Golden said in a news release. “The proposed [Accounting Standards Update] sets forth the board’s recommendations for improving this area of financial reporting, and for simplifying the application of hedge accounting guidance without compromising the quality of financial reporting information provided to investors.”

The exposure draft’s proposals to simplify the application of hedge accounting include:

  • Providing more time for the completion of initial quantitative assessments of hedge effectiveness.
  • Allowing subsequent assessments of hedge effectiveness to be performed on a qualitative basis when an initial quantitative test is required.
  • Clarifying the application of the critical terms match method for a group of forecasted transactions.
  • Allowing an institution that elects the shortcut method to continue hedge accounting by using a “long-haul” method to assess hedge effectiveness if the shortcut was not or no longer is appropriate after hedge inception.

Comments can be submitted through the board’s website by Nov. 22. FASB has tentatively scheduled two public round-table meetings to seek additional feedback on Dec. 2; the board requests that those interested in participating in one of the meetings submit written comments on the exposure draft by Nov. 4.

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

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