The Financial Accounting Standards Board (FASB) on Wednesday proposed an update designed to further align its derivatives and hedging standard with risk management strategies employed by organizations.
The update to Topic 815 would build off a new approach to hedge accounting that FASB implemented in August 2017. Those changes followed significant feedback from stakeholders that found hedge accounting to be among the most onerous areas of GAAP.
The 2017 standard change relaxed limitations on how a company can measure changes in fair value in certain hedging relationships. The provisions included the “last-of-layer” method, which “allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows,” as explained by FASB.
Wednesday’s proposed update would allow multiple layers of a single closed portfolio to be hedged under the method after stakeholder feedback indicated such a change would better reflect risk management activities. If the change is implemented, the last-of-layer method would be renamed to the “portfolio layer” method, FASB noted.
Other changes in the proposed update include clarifications for eligible hedging instruments and additional guidance on fair value hedge basis adjustments.
Comments on FASB’s proposed update are due by July 5. The Board is specifically seeking to determine whether the changes succeed in better aligning with risk management objectives, whether the scope has been properly determined, and how much time should be given for implementation, among other questions.
The effective date of the potential changes would be determined following consideration of feedback.