Despite broad assumptions that companies would rush to adopt new rules on hedge accounting because of their relative simplicity, only about 20 percent of companies expect to have the new accounting in place before it becomes mandatory.
That’s the finding of a recent Deloitte Webcast poll, where only one in five of more than 3,000 participants said their organizations have adopted or would adopt Accounting Standards Update No. 2017-12 before the Jan. 1, 2019, effective date. The Financial Accounting Standards Board approved the standard, now codified in the Accounting Standards Codification under Topic 815 on derivatives and hedging, in August 2017. The ASU was meant to cut through some of the rule complexities that made it difficult, even prohibitive, for companies to achieve hedge accounting.
Accounting leaders generally expected companies that rely on hedging as part of their financial risk management strategies to flock to the new rules because it would not only simplify their accounting, but also open doors for increased uses of hedging. “The standard can help companies minimize volatility within financial statements and enhance predictability in their earnings statements,” said Bill Fellows, a partner with Deloitte, in a statement. “This represents an opportunity that companies should consider taking full advantage of.”
The Webcast poll found only 11 percent of respondents who indicated their organizations had already adopted the new accounting in 2017 or early 2018 and 10 percent said the accounting would be in place by the fourth quarter of 2018. Roughly one-third, or 32 percent, said their organizations would adopt the standard by the Jan. 1, 2019, effective date that applies to calendar-year public companies. The remainder of participants said they didn’t know or the issue was not applicable to them.
To some extent, companies may be moving slowly because even a move to simpler accounting could present challenges. One in five respondents said they see an obstacle in navigating gray areas of the standard, like how to hedge an asset that does not have contractually specified terms. FASB has issued a proposed update to accounting standards to answer some technical questions but has not yet issued final guidance.
A similar number said they envision challenges in developing an efficient process for reviewing existing hedging instruments, strategies, and contracts as they transition to the new standard. Another one in five said they expect a steep learning curve in applying the new standard, perhaps because they don't typically engage in hedging strategies currently.