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.

SPONSORED REPORT

Get your clients ready for tax season

Upon its enactment in March, the American Rescue Plan Act (ARPA) introduced many new tax changes, some of which retroactively affected 2020 returns. Making the right moves now can help you mitigate any surprises heading into 2022.

100th ANNIVERSARY

Black CPA Centennial, 1921–2021

With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.