United States

FASB proposes to expand hedge accounting

FINANCIAL REPORTING INSIGHTS  | 

The Financial Accounting Standards Board recently issued a proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. If finalized, the proposed ASU would allow multiple-layer hedging relationships to be designated for a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments.

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 mortgaged-backed securities,  the last-of-layer method currently 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. Per the proposed ASU, the last-of-layer method would be renamed as the portfolio layer method and would be expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

In addition, the proposed ASU would:

  • Specify 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
  • Provide additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would be applicable 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

The proposed ASU is available for comment until July 5, 2021.

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