Planned changes to hedge accounting near completion

The FASB on March 22, 2017, agreed to make it easier to determine the effectiveness of certain risk management strategies, essentially completing the most detailed phase of its effort to update the hedge accounting guidance in U.S. GAAP.

The FASB’s planned changes are based on the September 2016 Proposed Accounting Standards Update (ASU) No. 2016-310, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The board’s research staff expects to draft the final version of the amendments and bring them to the board in May for a last round of debate on questions that cropped up during drafting. The board is also scheduled to determine the effective date for the accounting changes and the method for making the transition to the new guidance, FASB project supervising project manager Jeff Gabello said.

The FASB plans to publish the final update by the end of 2017.

The March 22 discussion focused on a narrow part of an essential piece of qualifying for hedge accounting — determining the effectiveness of a hedging transaction.

A unanimous board agreed that a cross currency basis spread, which is the difference in the credit risk between the two parties in a specialized type of foreign exchange transaction, be added to the list of items that can be excluded from assessments of a hedge contract’s effectiveness. Option premiums, which measure what an investor earns for selling an option, and forward points currently are the only items that can be excluded. A forward point is the premium or discount on a foreign currency forward contract.

“Staff has learned that some companies will not execute currency swaps to hedge FX [foreign exchange] risk because of the volatility that results from currency basis spreads, even though the currency swap may be the best risk mitigation tool available,” a FASB staff member told the board. Some businesses “tolerate” the income statement swings, even though they do not believe they reflect economic reality. Businesses explain the volatility to investors using non-GAAP measures, the staff member said.

Adding the spreads to the list of items that can be excluded from the effectiveness test will align the accounting with the economics of the transactions, the FASB agreed.

In addition, the FASB agreed that businesses can record changes in the fair value of excluded components of the contract in other comprehensive income. The initial value of the component would be amortized to earnings over the life of the derivative on a “systematic and rational basis.” Businesses would have the option, however, to record changes at fair value in earnings.

A unanimous FASB agreed. FASB member Marc Siegel was absent for the meeting, but FASB Chairman Russell Golden read his vote aloud.

“He is supportive of the option in this case although he is not a fan of options, and there are many options within the hedging model, which in and of itself is an option,” Golden said.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.


We have partnered with Thomson Reuters to issue our monthly Accounting insights. Please feel free to contact Baker Tilly at accounting@bakertilly.com if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.