FASB proposes hedge accounting changes

By Ken Tysiac

FASB proposed a new accounting standard Wednesday that is designed to better align hedge accounting with an organization’s risk management strategy.

The proposal would expand the current single-layer hedging model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments under the method.

To reflect that expansion, the last-of-layer method would be renamed as the portfolio-layer method.

The last-of-layer method was one of the major provisions of the hedging standard FASB issued in 2017. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows.

Stakeholders have told FASB that the ability to elect hedge accounting for a single layer is useful, but that hedge accounting could better reflect risk management activities if it were expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

The proposal also would:

  • Clarify eligible hedging instruments in a single-layer strategy.
  • Provide additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would apply to both the current single-layer model and the proposed multiple-layer model.
  • Indicate how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

Comments on the proposal can be submitted by July 5 at FASB’s website.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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