FASB expands hedge accounting standard to allow multiple layers

The Monetary Accounting Criteria Board issued an accounting criteria update Monday aimed at greater aligning hedge accounting with an organization’s threat management tactics.

The update builds on the hedging typical that FASB unveiled in 2017 that also experimented with to superior align the economic effects of danger administration activities with hedge accounting. That common upped the transparency around how the outcomes of hedging activities are presented on the face of the economic statements as very well as in the footnotes, for investors and analysts when hedge accounting is used.

Just one of the important provisions of the hedging normal was the addition of the final-of-layer hedging technique. For a closed portfolio of fixed-fee prepayable fiscal property or a single or additional advantageous passions secured by a portfolio of prepayable money instruments, together with home loans or property finance loan-backed securities, the past-of-layer strategy permits an entity to hedge its publicity to reasonable value modifications because of to adjustments in interest fees for a part of the portfolio that is not envisioned to be impacted by prepayments, defaults and other activities affecting the timing and sum of hard cash flows.

Nonetheless, due to the fact issuing that regular five decades back, numerous stakeholders have instructed FASB that the capability to elect hedge accounting for a single layer is helpful, but hedge accounting could greater replicate possibility management actions if it were expanded to let various layers of a solitary shut portfolio to be hedged beneath the process. Therefore, the new update expands the existing solitary-layer method to allow numerous hedged layers of a solitary closed portfolio under the system. To mirror that growth, the very last-of-layer system has now been renamed the portfolio layer approach.

“The expanded hedge accounting technique much better reflects the results of chance administration activities in the money statements and in the long run gives traders and other allocators of funds with much more clear, conclusion-helpful details all-around an entity’s use of derivatives,” mentioned FASB chair Richard Jones in a assertion.

In addition, the update expands the scope of the portfolio layer method to include things like nonprepayable belongings, and specifies qualified hedging devices in a solitary-layer hedge. It also presents excess assistance on the accounting for and disclosure of hedge basis changes less than the portfolio layer approach, as very well as specifying how hedge foundation changes ought to be deemed when deciding credit score losses for the assets bundled in the closed portfolio.

The accounting requirements update will implement to all entities that elect to use the portfolio layer strategy of hedge accounting. For general public enterprise entities, the ASU is efficient for fiscal many years beginning just after Dec. 15, 2022, and interim periods inside of those people fiscal many years. For all other entities, the ASU requires outcome for fiscal a long time setting up immediately after Dec. 15, 2023, and interim periods inside of people fiscal several years. In addition, early adoption is permitted.