Derivatives and hedge accounting

Derivatives, whether freestanding or embedded in other instruments, may be used to manage exposure to certain risks or for speculative purposes. Explore PwC's latest thinking on derivatives and hedging.

Quick update on what is changing

  • The FASB's new guidance in ASU 2017-12 more closely aligns hedge accounting with companies' risk management strategies, simplifies the application of hedge accounting, and increases transparency as to the scope and results of hedging programs.
  • The changes significantly affect what qualifies for hedge accounting, how hedge effectiveness is assessed, and how the hedging results are presented and disclosed in the financial statements.
  • The amendments can be early-adopted in any interim or annual period before the January 1, 2019 effective date for calendar-year-end public business entities (one year later for all other entities).
  • The FASB is addressing implementation issues related to ASU 2017-12 and considering other hedging issues. The technical and research agendas have the following projects related to hedging:
    • Codification improvements,

    • Last-of-layer method,

    • Inclusion of the Secured Overnight Financing Rate (SOFR) as a benchmark interest rate,

    • Other issues pertaining to the replacement of LIBOR with SOFR, and

    • Further alignment of hedge accounting with risk management activities.
  • Companies should continue to monitor future standard setting in these areas.

Derivatives and hedging accounting guide

Watch our video on accounting for excluded components

The new hedging guidance, including new guidance around excluded components, allows entities to better align their hedge accounting with their risk management activities. Specifically, the new guidance adds to the previous allowable exclusions and changes the recognition of excluded components. This video covers what components are eligible for exclusion from the assessment of effectiveness under the new hedging guidance, how to recognize such "excluded components" in the financial statements, and the the accounting treatment for excluded components upon discontinuance of a hedge. 

Duration: 4:25

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Heather Horn

US Strategic Thought Leader, National Professional Services Group, PwC US

David Schmid

IFRS & US Standard Setting Leader, National Professional Services Group, PwC US

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