Add a new standard on hedging to the onslaught of accounting changes companies will have to deal with in the next few years as the Financial Accounting Standards Board prepares to issue its third and final new standard dealing with financial instruments.
After wrapping up its redeliberation of comments on a 2016 exposure draft, FASB expects to publish its final Accounting Standards Update on hedge accounting in August 2017. The new standard is expected to take effect for public companies in fiscal years beginning after Dec. 15, 2018. That means calendar-year companies will begin applying it in 2019, a year after companies adopt new revenue recognition rules and the same year companies will adopt new lease accounting rules.
The hedge accounting standard is one of three FASB developed over several years to overhaul the accounting for financial instruments. Initially undertaken as a single standard, FASB chose to break the project apart into three separate standards — one governing the classification and measurement of financial instruments, one adopting a new forward-looking approach for recognizing loan losses, and now the hedging standard. The classification and measurement standard also takes effect in 2018, followed by the new “current expected credit loss” model for accounting for loan losses in 2020.
Unlike many of the major new standards that involve a mountain of new — and in some cases complex — accounting requirements, the hedge accounting standard is meant to make a traditionally complex area of accounting simpler. Hedge accounting, a common cause of restatements historically, has been regarded as one of the more difficult areas of accounting because of the complexity of prescriptive requirements that command rigid compliance with detailed terms.
FASB Chairman Russ Golden said in a statement the board received “overwhelmingly positive feedback” to the proposed changes to the hedge accounting model both from preparers and investors. “The resulting standard will better align the accounting rules with a company’s risk management activities, better reflect the economic results of hedging in the financial statements, and simplify hedge accounting treatment,” Golden said.
FASB says the new standard will refine and expand hedge accounting both for financial risks, such as interest rate risks, and commodity risks. The economic results of hedge activity will be presented in a more transparent way, the board says, both on the face of the financial statements and in the footnotes.
The board began its long and winding journey to new hedge accounting rules with a proposal in 2010 during the convergence era, where FASB was working with international accounting standard setters to try to make rules more consistent across jurisdictions. That 2010 proposal addressed not only derivates but all financial instrument accounting. Feedback to that all-encompassing proposal prompted the board to break the project apart and ultimately to put hedge accounting on the back burner.
The board resurrected hedge accounting simplification in 2016 with a proposal that focused on targeted improvements to existing GAAP rather than wholesale changes to the entire approach to accounting for derivatives. The board received only 60 comments to that proposal.