The US Financial Accounting Standards Board (FASB) has issued its long-awaited accounting standards update (ASU) to improve and simplify accounting rules around hedge accounting, the final component of its financial instruments convergence project with the International Accounting Standards Board (IASB)
Since the original issuance of the guidance in 1998, the FASB says it has been asked to address numerous practice issues that have developed over time. As a result, the FASB proposed broad-based changes to the hedge accounting model in two exposure drafts issued in 2008 and 2010.
However, after the comment period ended for the 2010 exposure draft, the project to improve the hedge accounting guidance was put on hold to allow the FASB to pursue other financial instrument initiatives. In the current project, the FASB decided not to overhaul the hedge accounting guidance but instead to focus on targeted improvements to expeditiously address key practice issues that have been identified by stakeholders.
The new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts.
The ASU’s amendments are intended to ‘better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results,’ FASB noted.
According to FASB, although the language used to describe hedge accounting guidance in its ASU and in IFRS 9, Financial Instruments, differs, there are several areas of alignment between the two standards, and it is expected that many common hedge accounting strategies will have similar outcomes related to hedging components of financial instruments and nonfinancial items and in the measurement of hedged items in fair value hedges of interest rate risk.
However, FASB notes differences still remain between the two standards in the criteria for qualifying for hedge accounting. Additionally, IFRS 9 retained the separate measurement and reporting of hedge ineffectiveness and does not have broad guidance on presentation.
Russell Golden, FASB chairman, said: ‘Companies and investors alike have expressed overwhelming support for this long-awaited standard. Thanks to their input, the final ASU better aligns the accounting rules with a company’s risk management activities, better reflects the economic results of hedging in the financial statements, and simplifies hedge accounting treatment.’
The ASU is effective for public companies in 2019 and private companies in 2020. Early adoption is permitted.
FASB’s ASU no. 2017-12—Derivatives and hedging (topic 815): targeted improvements to accounting for hedging activities is here.
