FASB Releases Hedge Accounting Standard

Published on November 10, 2017

The Financial Accounting Standards Board has released its long-awaited hedging standard, the final component of its financial instruments convergence project with the International Accounting Standards Board.

The accounting standards update has been in the works since 1998, when FASB last issued a standard for hedge accounting activities. After it agreed in 2002 to begin working with the IASB on converging accounting standards, FASB issued two exposure drafts in 2008 and 2010 on hedge accounting. However, after the comment period ended for the 2010 proposals, the project to improve hedge accounting guidance was put on hold to give FASB time to pursue other financial instrument initiatives. After FASB and the IASB diverged on issues such as accounting for impaired loans, the IASB issued a single set of International Financial Reporting Standards for financial instruments in IFRS 9 in July 2014. FASB then issued its standards under U.S. GAAP for the recognition and measurement of financial instruments in January 2016 and for credit losses in June 2016.

In the hedging project, FASB decided not to overhaul the hedge accounting guidance but instead to focus on targeted improvements to address key practice areas.

The accounting standards update takes effect for public companies in 2019 and private companies in 2020. But FASB is also allowing early adoption for companies if they want to begin using it right away.

The new standard also simplifies the hedge accounting documentation requirements to allow more time for entities to get all the documentation in place, as well as permit the use of a qualitative assessment on a periodic basis as opposed to a required quantification each quarter, he noted.  Another change is in the area of presentation and disclosure.

The new hedging standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, for public companies and for fiscal years beginning after Dec. 15, 2019 (and interim periods for fiscal years beginning after Dec. 15, 2020), for private companies. FASB is allowing early adoption in any interim period or fiscal years before the effective date.

The effective date of the new standard lands roughly in the middle between the effective dates of the classification and measurement standard and the credit losses standard, but early adoption is allowed.

Practical Changes
The new rules promise to make it easier for financial statement preparers to apply hedge accounting. There will be more strategies available to them on the nonfinancial and financial sides. The way that hedge results are measured is going to eliminate some of the ineffectiveness that's been reported in the past, getting rid of some of the separate reporting previously required.

Presentation will also be more closely aligned. All changes in the value of the hedging instrument have to be presented with the income statement effect of the hedge guidance. The disclosures will focus more on the effect of hedge accounting on those statement line items more clearly than today, taking the existing disclosures and rearranging them a bit.

The new standard also eases the application of hedge accounting by giving people more time to prepare certain aspects of their hedge documentation, such as quantitative testing. It also eases some of the methods typically applied in hedge accounting, such as the shortcut method and critical terms match, to make them easier to apply in practice.

In developing the new standard, FASB received important input from the Private Company Council, which like FASB is overseen by the Financial Accounting Foundation. The PCC advised FASB about the constraints faced by private companies that are not financial institutions and certain not-for-profit organizations in completing hedge documentation in a timely manner. FASB decided to provide relief by aligning the timing of performance and documentation of initial and subsequent effectiveness testing with the timing of the issuance of interim (if applicable) or annual financial statements.

For auditors, there might be some new controls they will need to put in place as well, particularly around the qualitative assessments of effectiveness that will be allowed, or around any new strategies.

Financial professionals will have some work to do in acquainting themselves with the new standard. A recent survey by Chatham Financial found that only 18 percent of the financial risk professionals it surveyed during a recent webcast considered themselves to be well versed in the proposed guidance. Only 11 percent said they have assessed the rules' impact on their programs and plan to early adopt the guidance. Risk professionals believe the greatest impact of the new standards will be enhancements to fair value hedge accounting (38 percent), followed by no longer separately measuring and presenting ineffectiveness (33 percent) and changes to the shortcut method and other effectiveness assessment approaches (15 percent).

With the major convergence projects such as revenue recognition, leasing and financial instruments now finalized, FASB is continuing to work on some major projects of its own, including long-duration insurance contracts and not-for-profit accounting for revenue from grants and contracts.
(Source:  AccountingToday - First Look - October4, 2017)