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FASB Clarifies Guidance for Derivative Instrument Accounting

Accounting Standards Update (ASU) No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, has been issued by the Financial Accounting Standards Board (“FASB”). The amendments clarify the guidance in Topic 815. Specifically, ASU No. 2016-05 clarifies that a change in the counterparty to a derivative instrument designated as the hedging instrument does not require dedesignation of the hedging relationship so long as all other hedge accounting criteria.

The amendments in ASU No. 2016-05 are effective for public companies’ financial statements issued for fiscal years, and interim periods within those years, starting after December 15, 2016. All other entities must apply the amendments to financial statements for fiscal years starting after December 15, 2017, and interim periods within those fiscal years starting after December 15, 2018.

The FASB is permitting early adoption, including in an interim period. The amendments can also be applied on a prospective or modified retrospective basis.

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