Accounting Standards Update 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

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April 2016

Overview

In March 2016, the FASB issued Accounting Standards Update 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (the “ASU”). The ASU addresses a lack of guidance in existing US GAAP related to the impact of derivative contract novations on existing hedge accounting relationships under Accounting Standards Codification Topic 815, Derivatives and Hedging (“ASC 815”). The ASU clarifies that a change in one of the parties (a novation) to a derivative contract that is part of an existing hedge accounting relationship under ASC 815 does not, in and of itself, require a de-designation of that hedge accounting relationship.

This issue of financial markets insights explores novations and why they happen, what is changing under ASU 2016-05, and next steps for businesses.

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