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Hedging may get easier under new FASB accounting standard

Investors said accounting rules made hedge accounting less understandable.

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A new FASB standard for hedge accounting is expected to provide better information to investors and eliminate accounting obstacles that prevented some organizations from using hedge accounting, FASB members said. FASB was expected to issue the standard in mid-August.

Under current GAAP, ASC Topic 815, Derivatives and Hedging, provides special accounting rules for hedging activities. But the standard was written in 1998, and practice issues have evolved over time. Financial statement preparers told FASB that they had difficulties applying hedge accounting and that their risk management techniques are not aligned with the accounting under the current standard.

Meanwhile, FASB Vice Chairman James Kroeker said that on some occasions when companies have had to restate their financial statements because of problems with their hedge accounting, investors have said they understood companies’ activities better by examining the original financial statements, before they were restated to comply with the accounting rules.

FASB Chairman Russell Golden said in a news release that the new standard will create better alignment between companies’ risk management activities and the accounting rules. Board members said the standard may resolve some accounting issues that were so challenging that they kept some organizations from even attempting to use hedging as a risk management tool.

The new standard will refine hedge accounting and expand it for both financial (such as interest rate) and commodity risks. The standard is designed to present the economic results of hedging in a more transparent way on the face of the financial statements and in the footnotes.

The standard will take effect for public companies for fiscal years and interim periods within those fiscal years beginning after Dec. 15, 2018. For private companies, the standard will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods for fiscal years beginning after Dec. 15, 2020. Early adoption will be permitted.