Accounting for Hedging Activities
In August, 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. It is an effort to improve the financial reporting of hedging relationships, better portray the economic results of an entity’s risk management activities, and simplify the application of hedge accounting guidance.
The guidance includes the following:
- Eliminates the separate measurement and reporting of hedge ineffectiveness.
- Allows more risk components to qualify for hedge accounting.
- Adds the SIFMA swap rate to the list of permissible benchmark interest rates in the U.S.
- Amends measurement methods for calculating the change in fair value of the hedged item in fair value hedges of interest rate risk.
- Introduces the “last-of-layer” method for hedges of portfolios of pre-payable financial assets.
- Permits an entity to exclude from the assessment of effectiveness the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread.
- Permits an entity to recognize in earnings the initial value of amounts excluded from the assessment of effectiveness using a systematic and rational method over the life of the hedging instrument.
- Aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s risk management activities. An entity is now required to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.
- Amends existing income statement disclosures to focus on the effects of hedge accounting on individual income statement line items.
- Adds new balance sheet disclosures regarding fair value hedge basis adjustments.
- Allows an entity to perform subsequent assessments of hedge effectiveness qualitatively for instances in which initial quantitative testing is required.
- For all entities, extends the date by which the initial prospective quantitative assessment of hedge effectiveness must be performed to the first quarterly effectiveness date using the data applicable as of hedge inception.
- Allows an entity to assume that the hedging derivative matures at the same time as the forecasted transactions if both the derivative maturity and the forecasted transactions occur within the same 31-day period or fiscal month for purposes of evaluating the qualifying criteria for the critical terms match method.
- Allows an entity to document a long-haul method of assessing effectiveness at hedge inception that the entity may use if it determines that use of the shortcut method was not or no longer is appropriate.
The guidance is effective for public business entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For other entities it is effective for fiscal years beginning after December 15, 2019, and interim period beginning after December 15, 2020. Early application is permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption.
For more information and to download the ASU please visit www.fasb.org.