FASB standard aims to simplify hedge accounting

The board aims to equalize nonfinancial and financial hedging strategies.

FASB issued a new standard that is designed to make hedge accounting easier for financial statement preparers and easier for financial statement users to understand. Hedge accounting for both financial and commodity risks is expanded under the new standard.

James Kroeker, FASB's vice chairman, said during an interview that the standard puts nonfinancial hedging on an equal playing field with many of the financial hedging strategies that have been available.

According to an issue of FASB in Focus devoted to the standard, under refinements made to measurement of the hedged item, preparers will:

  • Measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
  • Consider only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity when calculating the fair value of the hedged item.
  • Measure the fair value of the hedged item using the benchmark rate component of the contracted coupon cash flows determined at conception.

The board also hopes to simplify hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness.

The new hedge accounting standard does not affect the GAAP exception that provides a simplified hedge accounting method for certain interest rate swaps that private companies other than financial institutions enter to convert variable-rate debt to fixed-rate debt. That exception remains available to private companies. Private company preparers also will get additional relief with documentation requirements that are more closely aligned with the issuance of financial statements.

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

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