On March 28, the FASB held a public board meeting where they discussed certain provisions of the hedge accounting guidance issued in 20171. Some provisions were clarified, while the Board agreed to revisit others at a future meeting.
As a result of feedback received, the FASB will add a narrow-scope project to determine how to account for basis adjustments created through the last of layer approach. The project will also address whether hedging multiple layers should be allowed, which some stakeholders believe would more closely align the last of layer approach with risk management activities. After this narrow-scope project is concluded, the FASB will consider whether to expand the scope of the last of layer approach beyond prepayable assets to include prepayable liabilities.
At the March 28 meeting, the FASB concluded that a reporting entity may hedge interest rate risk in separate and distinct series of consecutive cash flows from a single financial asset or liability. For example, in a ten-year debt issuance, an issuer may designate the cash flows to occur in Years 2 through 4 to one hedging relationship and the cash flows to occur in Years 6 through 8 to a separate hedging relationship. The FASB concluded that permitting this more closely aligns hedge accounting with risk management activities.
The FASB noted that the conclusions reached on this issue for a single asset or liability should not be analogized to hedging multiple layers in the last of layer approach. As discussed above, the potential for hedging multiple layers under the last of layer approach will be addressed by the FASB in a separate project.
The new hedge accounting framework expanded the hedge accounting model for non-financial exposures by allowing entities to designate a contractually specified component as the hedged risk.
The FASB has received questions about various aspects of this model, including about the nature of the contract, the timing of when a contract must be in place, and whether it can be applied to spot market transactions.
The FASB indicated that it will form a project resource group to assist the FASB in monitoring implementation of the contractually specified component model (and potentially other issues). The project resource group is expected to be made up of a cross section of stakeholders that will assist the FASB in understanding issues that arise during the course of the implementation of the new guidance.
When determining whether a hedged forecasted transaction is probable of occurring under current GAAP, depending on how the hedge relationship is documented, reporting entities may need to consider both the designated hedged transaction and hedged risk. In some cases, companies document the hedged risk as part of the identification of the hedged forecasted transaction. The FASB noted that one of its objectives in the updated hedging guidance was to make a distinction between the hedged risk and the hedged forecasted transaction, such that a change to the hedged risk would not, in and of itself, indicate that the hedging relationship should be discontinued or that the hedged forecasted transaction is probable of not occurring.
The FASB received feedback that this distinction was not clear. As a result, the FASB will consider what additional updates need to be made to ASC 815 to reflect the FASB's intent.
1ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities
The actions discussed at the FASB meeting have the potential to significantly impact how key provisions of the revised hedging guidance are applied.
The 2017 amendments to the hedge accounting guidance were adoptable upon issuance, but are required to be adopted by public business entities for fiscal years beginning after December 15, 2018, and for all other entities, one year later.
Companies should continue to monitor future standard setting in this area and the discussions of the new project resource group to assess the implications on its current and future accounting conclusions.
© 2016 - 2021 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.