A guide to hedge accounting upon the adoption of ASU 2017-12
February 2019 (Updated January 2021)
Our publication, A guide to hedge accounting upon the adoption of ASU 2017-12, is intended to provide a high-level overview of hedge accounting based on the hedging subtopics within the Financial Accounting Standards Board’s Accounting Standards Codification, as amended by Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. More specifically, the guide includes the following:
- Chapter 1: Overview of hedge accounting and the requirements to apply it, which: (a) provides a high-level overview of hedge accounting, including the three major types of hedges and (b) summarizes the requirements that need to be met to apply hedge accounting, including: (i) formal designation and documentation, (ii) eligible hedged items and transactions, (iii) eligible hedging instruments and (iv) the requirement to assess the effectiveness of hedges.
- Chapter 2: Commodities hedging, which: (a) provides an overview of commodities hedging by discussing the types of hedges that are commonly employed in practice, (b) provides suggestions for structuring hedges in a manner that will promote high effectiveness, (c) discusses the benefits of, and requirements to, hedge a contractually specified component and (d) provides several examples of commodities hedges.
- Chapter 3: Hedges related to interest rate risk, which provides: (a) an overview of hedges related to interest rate risk, including a discussion of the types of cash flow and fair value hedges that are commonly employed, (b) a discussion of the accounting implications of hedging interest rate risk rather than hedging total changes in cash flows or fair value and (c) several examples of hedges of interest rate risk.
- Chapter 4: Foreign currency hedges, which provides: (a) an overview of foreign currency hedges and the incremental requirements associated therewith to qualify for hedge accounting, (b) an overview of the accounting for net investment hedges and (c) several examples of foreign currency hedging.
- Chapter 5: Fair value hedge accounting, which is focused on the mechanics of fair value hedge accounting, including the adjustments to the hedged item, and discontinuing hedge accounting.
- Chapter 6: Cash flow hedge accounting, which is focused on the mechanics of cash flow hedge accounting, including the reclassification of amounts in other comprehensive income to earnings, and discontinuing hedge accounting.
The guide also includes a high-level overview of the changes brought about by ASU 2017-12 and ASU 2019-14, and the transition provisions for both.