FASB Reaches Decisions on Hedge Accounting Project

March 14, 2017

During a review last week on its proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, the Financial Accounting Standards Board (“FASB”) reached conclusions on the following topics:

  • The market yield test. The FASB decided to exclude the market yield test from the final standard. Companies would have been required to use the total contractual coupon cash flows to determine fair value of the hedge item attributable to interest rate risk, if the hedge item’s market yield is below the benchmark interest rate at hedge inception. Companies now have the freedom to use the total contractual coupon cash flows or the benchmark rate component cash flows established at hedge inception for all fair value hedges of interest rate risk.
  • The last layer approach. The FASB will include the last layer of approach with the board’s hedge accounting project for fair value hedges of interest rate risk of prepayable assets. This approach permits a company to assign as the hedged item the last dollar amount of a prepayable asset or a closed portfolio of prepayable assets.