Hedging may get easier under new FASB accounting standard

A new standard for hedge accounting that FASB expects to approve soon is designed to provide better information to investors and eliminate accounting obstacles that prevented some organizations from using hedge accounting, FASB members said.

All seven FASB members said during a public meeting Wednesday that they plan to support the standard when the final ballot draft is issued in a few weeks. After FASB approves the standard on the written ballot, it is expected to be issued 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. The standard will better reflect the economic results of hedging in the financial statements and will simplify hedge accounting treatment, Golden said.

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.

“This will open up new opportunities to apply hedge accounting where it’s appropriate, and that’s all very good,” FASB member Hal Schroeder said. “… And the thing I’m particularly excited about is that it’s a big step forward in helping investors understand the hedging techniques that are out there. This is a blind spot for many investors.”

Schroeder said investors understand how hedging works, but the way it is currently presented in financial statements makes it difficult to understand how companies are using hedging to manage risk.

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.

Kroeker said that although there will be implementation costs associated with the change, the new standard should reduce ongoing costs for hedge accounting for preparers.

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.

—Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.