FASB Advances Project to Simplify Hedge Accounting

February 2, 2017

Progress continues on the Financial Accounting Standards Board’s (“FASB”) attempts to simplify hedge accounting. At last week’s meeting, the FASB affirmed the more popular amendments under Proposed Accounting Standards Update (ASU) No. 2016-310, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

Amendments that were agreed upon include allowing the use of hedge accounting for certain parts of nonfinancial items. The FASB will add Securities Industry and Financial Markets Association Municipal Swap Rate as an acceptable benchmark interest rate for hedges of fixed-interest-rate items. The Board also agreed to provide relief from the penalty created by an instrument no longer qualifying for the hedge accounting under the shortcut method. In short, a hedging transaction that originally qualified as effective under the shortcut method but no longer qualifies under the shortcut method is currently, by default, not ineligible for hedge accounting regardless of whether it qualifies under the long-haul method. The proposal would eliminate this default conclusion.

In addition, the FASB proposes to allow companies to conduct an initial review of hedge effectiveness after a hedge is designated, but not after the quarterly reporting date. In addition, the FASB proposes several changes to the presentation requirements.

Discussions on the hedge accounting amendments are expected to continue this month, with the FASB research staff possibly concluding major decisions before the March 8 meeting. If approved, FASB’s final decision is expected to be released later this year.