The Financial Accounting Standards Board recently issued Accounting Standards Update (ASU) 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method, which allows multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments.
Previously, 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 allowed an entity to hedge its exposure to fair value changes due to changes in interest rates for a designated amount of the asset or assets in the portfolio that is not expected to be affected by prepayments, defaults and other events affecting the timing and amount of cash flows. ASU 2022-01 expands the last-of-layer method that permitted only one hedged layer to now allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method.
In addition, the ASU 2022-01:
- Expands the scope of the portfolio layer method to include nonprepayable financial assets
- Specifies that eligible hedging instruments in a single-layer strategy may include spot-starting or forward-starting constant-notional swaps, or spot- or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated
- Provides additional guidance on the accounting for and disclosure of fair value hedge basis adjustments under the portfolio layer method
- Specifies how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio
For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted on any date on or after March 28, 2022 for any entity that has adopted ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, for the corresponding period. If an entity adopts the amendments in an interim period, the effect of adopting the amendments related to basis adjustments should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).