After several years of relative inaction on hedge accounting, now the Financial Accounting Standards Board is near issuing a proposed update to accounting standards that would have a big effect on what would qualify for hedge accounting and how the accounting would be explained in financial statements.
FASB has decided tentatively to propose a number of targeted amendments to hedge accounting rules for both financial and nonfinancial hedges. The board is developing a draft accounting standards update to amend Topic 815 in the Accounting Standards Codification while the staff also is planning to study the costs, benefits, and complexity of what the board plans to propose. An proposed update to accounting standards is expected by the end of 2015.
According to a PwC alert, FASB’s plan is to propose “targeted amendments” to several areas of existing hedge accounting guidance for both financial and nonfinancial hedges. “The goal is to better align hedge accounting with a reporting entity’s risk management objectives and simplify hedge accounting for preparers,” the firm says. “The changes, if finalized, will significantly change what qualifies for hedge accounting, how it is documented, how hedge effectiveness is assessed and hedge ineffectiveness is measured, and how the hedging results are presented and disclosed in the financial statements.” An exposure draft is expected by the end of the year.
The long journey to improve hedge accounting rules began with exposure drafts of new standards in 2008 and 2010. At one time, hedge accounting became part of a more comprehensive effort to overhaul all accounting for financial instruments, but the board subsequently separated its consideration of financial instruments into three projects -- classification and measurement, impairment, and hedging. The hedging project fell behind others after the second exposure draft as FASB focused its efforts on big convergence efforts with the International Accounting Standards Board, like revenue recognition, leasing, and the other financial instrument projects.
When it is issued in the fourth quarter, the proposal is expected to change documentation and effectiveness testing requirements. Initial quantitative effectiveness testing would be required of all hedges unless they meet the requirements for the shortcut or critical terms match methods. Quantitative testing would not need to be documented until the end of the first three-month effectiveness testing period , and subsequent quantitative effectiveness testing would not need to be performed unless facts and circumstances change.
FASB also reached conclusions on a number of additional areas, including benchmark rates, the use of a total coupon in fair value hedges, callable fixed-rate debt, partial-term fair value hedging, and the use of the shortcut method.