FASB expands hedge accounting standard to allow multiple layers
The Economical Accounting Specifications Board issued an accounting specifications update Monday aimed at much better aligning hedge accounting with an organization’s danger administration methods.
The update builds on the hedging regular that FASB unveiled in 2017 that also attempted to better align the financial outcomes of risk administration functions with hedge accounting. That common upped the transparency all-around how the results of hedging pursuits are presented on the facial area of the monetary statements as perfectly as in the footnotes, for investors and analysts when hedge accounting is used.
One particular of the main provisions of the hedging normal was the addition of the previous-of-layer hedging technique. For a closed portfolio of fastened-price prepayable economic property or a person or extra helpful passions secured by a portfolio of prepayable economic instruments, such as mortgages or mortgage loan-backed securities, the very last-of-layer system permits an entity to hedge its publicity to fair worth modifications owing to alterations in interest premiums for a portion of the portfolio that is not expected to be affected by prepayments, defaults and other activities influencing the timing and sum of hard cash flows.
However, because issuing that regular 5 a long time ago, numerous stakeholders have informed FASB that the ability to elect hedge accounting for a solitary layer is practical, but hedge accounting could greater replicate risk management things to do if it ended up expanded to let various levels of a single closed portfolio to be hedged below the method. Consequently, the new update expands the latest one-layer system to permit multiple hedged levels of a single shut portfolio underneath the system. To mirror that growth, the last-of-layer system has now been renamed the portfolio layer approach.
“The expanded hedge accounting technique improved demonstrates the results of chance management pursuits in the financial statements and in the long run gives buyers and other allocators of capital with far more transparent, conclusion-handy data all around an entity’s use of derivatives,” said FASB chair Richard Jones in a assertion.
In addition, the update expands the scope of the portfolio layer process to consist of nonprepayable property, and specifies qualified hedging instruments in a single-layer hedge. It also presents more steerage on the accounting for and disclosure of hedge foundation adjustments below the portfolio layer process, as nicely as specifying how hedge foundation changes should be regarded when determining credit rating losses for the property included in the shut portfolio.
The accounting criteria update will utilize to all entities that elect to use the portfolio layer method of hedge accounting. For general public company entities, the ASU is effective for fiscal years commencing following Dec. 15, 2022, and interim periods in those people fiscal years. For all other entities, the ASU can take outcome for fiscal several years setting up soon after Dec. 15, 2023, and interim durations inside these fiscal decades. In addition, early adoption is permitted.
