Hedging - are you early adopting the FASB's new guidance?

Video , PwC US Feb 19, 2018

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Watch PwC's Maria Constantinou discuss certain considerations for early adoption of the FASB’s new hedging guidance. This guidance is aimed at aligning accounting with risk management strategies and simplifying its application.


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Hi, I'm Maria Constantinou, a Director in PwC's National Office.

Last August, the FASB issued guidance designed to more closely align hedge accounting with companies' risk management programs, simplify its application, and increase transparency.

The effective date for calendar-year-end public companies is January 1, 2019, but we do expect a number of companies to early adopt the new guidance in 2018.

I'd like to spend a few minutes on some things to think about if you plan to early adopt, all of which are included in our updated Guide to Accounting for Derivatives and Hedging.

First, transition elections: You'll want to consider the package of elections available, including considerations specific to early adoption, before deciding on an adoption date.

Let's talk about some of the changes you may want to take advantage of:

The first one is the ability to measure changes in the fair value of fixed-rate hedged items for hedges of benchmark interest rate risk using the benchmark component of the total coupon.

Before, you had to include the total coupon in this measurement. This new way to measure the hedged item considers only the benchmark component of the total coupon; ignoring the spread above the benchmark interest rate makes hedges more effective.

This change is permitted for all fair value benchmark interest rate hedges of fixed-rate assets or liabilities, regardless of whether the coupon or yield is more or less than the benchmark rate, so it also helps high credit quality borrowers.

Next up, partial-term fair value hedges of a fixed-rate asset or liability are now permitted for benchmark interest rate hedges.

Before, you had to hedge the total instrument or a percentage of it, but now, you can hedge any consecutive cash flows, such as the first 3 years of a 5-year bond.

Another change is a new way you can recognize components excluded from the assessment of effectiveness.

Under the new standard, you can amortize excluded components into earnings over the life of the hedging instrument on all hedges, including fair value and cash flow hedges and hedges of net investments in foreign operations.

Interim changes in the fair value of excluded components would be recognized in other comprehensive income.

Before, excluded components were required to be marked-to-market through current earnings.

Amortizing them reduces the income statement volatility of certain strategies, such as some options-based strategies.

On the nonfinancial side, you can now hedge a contractually specified component in a cash flow hedge of a forecasted purchase or sale of a nonfinancial item, like the purchase of a commodity.

Under the previous guidance, you had to hedge the total change in cash flows related to the purchase or sale of a nonfinancial item. This might have included the spread above an index for transportation to a delivery point or other costs.

Now, you can isolate the part of the purchase price that is based on an index - if it's specified in a contract - and hedge only that.

As a result, more hedging strategies will qualify for hedge accounting, and others will be more effective.

The last one I'll cover today - you can save time using a qualitative assessment of effectiveness.

Quantitative assessments, such as regression analyses, are no longer required each period. After an initial quantitative test, under certain circumstances, subsequent tests can be performed qualitatively.

This and other changes, like some relief on timing of certain parts of the hedge documentation, will make hedge accounting simpler to apply.

For more information on these and other changes that can help you align hedge accounting with your risk management activities, check out our new Derivatives and Hedging guide, on CFOdirect.com.

And be sure to check CFOdirect.com periodically for updates on interpretive issues related to the new hedging guidance.

Thank you!

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