In the final installment of the trifecta approach to improving financial instrument accounting, the Financial Accounting Standards Board has issued a fresh proposal on how to revise the rules for hedge accounting.

FASB has already issued new accounting standards on how to recognize and measure financial instruments in financial statements, and how to reflect credit losses. The new proposal on hedge accounting would finish the rewrite of financial instrument accounting originally undertaken in tandem with the International Accounting Standards Board in the quest for converged accounting rules around the globe.

Ultimately, FASB’s newest proposal represents more of a set of targeted upgrades to existing standards than the overhaul the board originally envisioned. The board issued proposals in 2008 and 2010, the latter of which ended up on the back burner as FASB decided to pursue the standards on recognition and measurement and on credit losses first. Other bigger changes in accounting standards also consumed much of FASB’s agenda, like those for revenue recognition and leases, for example.

FASB says the proposed accounting standards update is meant to address numerous practice issues that have developed over the nearly 20 years that U.S. GAAP has contained detailed guidance on how to recognize hedge accounting in financial statements. “Stakeholders shared concerns that current hedge accounting requirements do not faithfully portray the economic results of an institution’s risk management activities,” said Russ Golden, chairman of FASB, in a statement. “The proposed ASU sets forth the board’s recommendations for improving this area of financial reporting and for simplifying the application of hedge accounting guidance without compromising the quality of financial reporting information provided to investors.”

The newest proposal would make changes to rules that would lead to better portrayal of the economic effect of a particular financial institution’s risk management activities, FASB says. It also would simplify the current rules, which have long been characterized as some of the most complicated rules in all of GAAP.

In terms or reflecting the economics, the proposal would expand the use of component hedging for both nonfinancial and financial risk, and it would refine the measurement techniques for hedge items in fair value hedges of benchmark interest rate risk. It would eliminate the separate measurement and reporting of hedge ineffectiveness, and it would revise requirements around cash flow hedges and net investment hedges as well as how the fair value of hedge instruments are recorded. Enhanced disclosures also are included.

As for the simplification measures, the proposal would provide more time for completing the initial qualitative assessments of hedge effectiveness and revise requirements around subsequent assessments of hedge effectiveness. It would clarify the critical terms match method for a group of forecasted transactions, and it would create new allowances around use of the shortcut method. FASB is planning a webcast to explain the proposal and roundtable discussions to elicit feedback. The board is asking for written feedback by Nov. 2.

 

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