The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815): Hedge Accounting Improvements, to align hedge accounting more closely with the economics of an entity’s risk management activities.
During the FASB’s 2021 agenda consultation project and other outreach, stakeholders noted that, in certain instances, current accounting guidance makes it challenging to apply or continue to apply hedge accounting for otherwise highly effective hedging relationships. This results in less decision-useful information for investors. Stakeholders also identified areas of hedge accounting guidance that require updating to address the impact of the global reference rate reform.
The proposed ASU addresses five issues intended to enable financial statements to better reflect certain hedging strategies by allowing entities to achieve and maintain hedge accounting for a greater number of highly effective economic hedges. The proposed amendments also intend to limit unintuitive dedesignation events and missed forecasted transactions for those hedging relationships. The FASB believes that the proposed changes to the hedge accounting guidance would improve the decision-usefulness of information provided to investors.
The proposed ASU would affect the following types of hedges:
- A cash flow hedge of a group of forecasted transactions where the individual forecasted transactions within the group share a similar hedged risk
- A cash flow hedge of forecasted interest payments on a variable-rate debt instrument with contractual terms that permit the borrower to change the interest rate index, interest rate reset frequency, or both, of the debt instrument
- A cash flow hedge of a variable price component of a forecasted purchase or sale of a nonfinancial asset
- A cash flow hedge where the hedging instrument is a compound derivative composed of a written option and a non-option derivative (e.g., an interest rate swap that contains a written cap or floor on the variable rate)
- A dual hedge (i.e., a hedge for which a foreign-currency-denominated debt instrument is both designated as the hedging instrument in a net investment of a foreign operation and designated as the hedged item in a fair value hedge of interest rate risk)
The FASB will determine the effective date for the proposed ASU after considering feedback from stakeholders.
The proposed ASU would require an entity to apply the proposed guidance on a prospective basis for existing hedging relationships as of the date of adoption. All entities would be allowed to early adopt on any date on or after issuance of a final ASU.
Stakeholders are encouraged to review and provide input on the proposed ASU by November 25, 2024.
