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FASB proposes changes to hedge accounting guidance

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The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that would make targeted improvements to the accounting guidance for hedging activities.

Stakeholders are encouraged to review and provide comment on the proposed ASU by 22 November 2016.
“Stakeholders shared concerns that current hedge accounting requirements do not faithfully portray the economic results of an institution’s risk management activities,” says FASB chairman Russell G. Golden. “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.”
This Exposure Draft contains proposals for improving how the economic results of an institution’s risk management activities are portrayed by expanding the use of component hedging for both nonfinancial and financial risks, and refining the measurement techniques for hedged items in fair value hedges of benchmark interest rate risk.
The draft also proposes eliminating the separate measurement and reporting of hedge ineffectiveness, and requiring for cash flow and net investment hedges that all changes in fair value of the hedging instrument included in the hedging relationship be deferred in other comprehensive income and released to the income statement in the period(s) when the hedged item affects earnings.
Other changes include requiring that changes in the fair value of hedging instruments be recorded in the same income statement line item as the earnings effect of the hedged item, and requiring enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items.
Additionally, the draft contains proposals to simplify the application of hedge accounting by providing more time for the completion of initial quantitative assessments of hedge effectiveness, allowing subsequent assessments of hedge effectiveness to be performed on a qualitative basis when an initial quantitative test is required, and clarifying the application of the critical terms match method for a group of forecasted transactions.
The draft also proposes allowing an institution that elects the shortcut method to continue hedge accounting by using a “long-haul” method to assess hedge effectiveness if use of the shortcut method was not or no longer is appropriate after hedge inception.
To elicit additional feedback on its proposals, the board tentatively has scheduled two public roundtable meetings at its Norwalk, Connecticut offices on 2 December 2016.
The Board will determine an effective date for the ASU after redeliberating all comments received during the comment period and from the public round table meetings. Early application of the proposed amendments would be permitted at the beginning of any fiscal year before the effective date.

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