Financial Accounting Standards Board staff issued a question-and-answer document Tuesday to address questions about the effects of the coronavirus pandemic on cash flow hedge accounting under Accounting Standards Codification Topic 815, Derivatives and Hedging.
The Q&A is the latest attempt by FASB staff to provide guidance to stakeholders on how accounting standards are being affected by the ongoing pandemic. In this case, questions have been raised about how to account for the cancellation of or delay in forecasted transactions as a result of COVID-19. ASC 815 guidance includes when to discontinue cash flow hedge accounting and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings.
The first question to FASB asks whether delays in the timing of forecasted transactions related to the effects of the pandemic should be considered rare cases caused by extenuating circumstances outside the control or influence of an entity when cash flow hedge accounting has been discontinued. Under ASC 815, when cash flow hedge accounting is discontinued, amounts deferred in AOCI remain there unless it is probable the forecasted transaction will not occur by the end of the original specified time period or within two months after it. Rare extenuating circumstances outside the entity’s control that cause a delay beyond the two-month period call for continuing the deferral of amounts in AOCI until the forecasted transaction affects earnings.
FASB staff clarified that delays in timing of forecasted transactions judged to be related to COVID-19 may be considered a rare case exception caused by extenuating circumstances under ASC 815, but only in situations when the forecasted transaction remains probable of occurring. If the forecasted transaction is determined to be probable of occurring after the two-month period, amounts reported in AOCI associated with the forecasted transaction should be retained there until that transaction affects earnings. If it is determined, based on the nature of the transaction and the entity’s business, that the forecasted transaction is no longer probable of occurring within a reasonable time beyond the additional two-month period, the exception would not apply and amounts previously reported in AOCI should be immediately reclassified into earnings and disclosed.
The second question asks if an entity determines amounts deferred in AOCI should be reclassified to earnings because of missed forecasts related to the effects of the pandemic, should those missed forecasts be considered when determining whether the entity has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. ASC 815 states that a pattern of determining that forecasted transactions are probable of not occurring would call into question an entity’s ability to accurately predict forecasted transactions and the propriety of its using cash flow hedge accounting in the future for similar transactions.
FASB staff indicated it would be acceptable for an entity to determine that missed forecasts related to COVID-19 do not need to be considered when determining whether it has exhibited a pattern of missing forecasts under the guidance. Determining whether the missed forecast is related to effects of COVID-19 requires judgment based on the entity’s facts and circumstances. If an entity determines that a missed forecast is related to effects of COVID-19, it would continue to account for (and disclose) those missed forecasts in accordance with ASC 815.
FASB staff said it intends to continue to address questions like these as they are received. Staff previously tackled questions on lease concessions related to coronavirus earlier this month, and the board has separately voted on tentative effective date delays to standards affecting revenue recognition and leases as part of its pandemic response.