United States

Proposed improvements to accounting for hedging activities

FINANCIAL REPORTING INSIGHTS  | 

On September 8, 2016, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. One of the objectives of the proposed ASU is to better align the financial reporting of hedging relationships with entities’ risk management activities. In that regard, one of the most notable proposed changes would facilitate hedge accounting for forecasted purchases and sales of nonfinancial items, such as commodities, in that the designated hedged risk would be permitted to be a contractually specified component rather than the overall variability in cash flows. Similar improvements are proposed to permit hedge accounting for additional risk components related to hedges of interest rate risk associated with financial instruments.  

Certain changes are proposed with the objective of simplifying hedge accounting, including eliminating the requirement to separately measure and report the ineffectiveness associated with hedging relationships. Additionally, for those hedging relationships that require quantitative testing of effectiveness, while the initial prospective quantitative assessment requirement would be retained, subsequent quantitative effectiveness testing would be required only if facts and circumstances change such that the entity can no longer assert qualitatively that the hedging relationship was and continues to be highly effective.  

Interested parties are encouraged to submit comments to the FASB on the proposed ASU through November 22, 2016. The FASB intends to establish the effective date for a final standard after considering the feedback it receives, and permit early application as of the beginning of a fiscal year.