United States

Proposed clarifications to the derivatives and hedging standard

FINANCIAL REPORTING INSIGHTS  | 

To clarify certain sections of Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, the Financial Accounting Standards Board recently issued a proposed ASU, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting.

The proposed ASU primarily addresses the change in hedged risk in a cash flow hedge. ASU 2017-12 allowed the risk causing variability in cash flows of the forecasted transaction to change (for example, from one variable interest rate to another variable interest rate or from one commodity index to a different index for the same commodity) if certain criteria are met. If finalized, the proposed ASU would clarify whether that change can happen both prospectively (i.e., before the forecasted transaction occurs) and retrospectively (i.e., after the forecasted transaction occurs) and, if so, how hedge accounting guidance should be applied in those instances.

Other issues addressed in the proposed ASU include:

  • Contractually specified components in cash flow hedges of nonfinancial forecasted transactions
  • A foreign-currency-denominated debt instrument as a hedging instrument and hedged item (dual hedge)
  • Use of the term “prepayable” under the shortcut method

The proposed ASU would be effective for all entities for fiscal years beginning after December 15, 2020. For public business entities, the proposed ASU would be effective for interim periods within fiscal years beginning after December 15, 2020. For all other entities, the proposed amendments would be effective for interim periods within fiscal years beginning after December 15, 2021. Early adoption would be permitted for all entities on any date on or after issuance of a final ASU if an entity already has adopted the amendments in ASU 2017-12.

The proposed ASU is available for comment until January 13, 2020.

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