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Financial instruments — Hedging

On August 28, 2017, the FASB issued ASU 2017-12, which amends the hedge accounting recognition and presentation requirements in ASC 815. The Board’s objectives in issuing the ASU are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.

Overall Hedging Model

What Has Not Changed?

ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve hedge accounting and have that accounting better reflect its risk management activities. Although the changes are substantial, constituents should note the following key aspects of hedge accounting under preadoption guidance that the Board retained:

  • The “highly effective” threshold for qualifying hedging relationships.
  • The ability for an entity to:
    • Voluntarily designate a hedging relationship.
    • Designate certain component risks of the hedged item as the hedged risk.
    • Apply the critical-terms-match method or the shortcut method.
  • The benchmark interest rate definition and concept for hedges of fixed-rate financial instruments (i.e., fair value hedges of financial instruments).
  • The required timing for the preparation of all hedge documentation for public companies and private companies that are financial institutions, except for the documentation related to the initial prospective quantitative hedge effectiveness assessment (discussed below).
  • A number of disclosure requirements.

What Has Changed?

Key changes made to the hedge accounting model include the following:

  • Elimination of the concept of recognizing periodic hedge ineffectiveness for cash flow and net investment hedges.
  • Recognition and presentation of changes in the fair value of the hedging instrument.
  • Recognition and presentation of components excluded from an entity’s hedge effectiveness assessment.
  • Addition of the ability to exclude cross-currency basis spreads for currency swaps from an entity’s hedge effectiveness assessment.
  • Addition of the ability to elect to perform subsequent effectiveness assessments qualitatively.
  • Elimination of the benchmark interest rate concept for variable-rate instruments in cash flow hedges. An entity can now designate the contractually specified interest rate as the hedged risk.
  • Addition of the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as a benchmark interest rate.
  • Addition of the ability to designate a “fallback” long-haul method for the shortcut method.
  • Addition of the ability to apply the shortcut method to partial-term fair value hedges of interest rate risk.
  • Enhancement of the ability to use the critical-terms-match method for cash flow hedge of groups of forecasted transactions when the timing of the hedged transactions does not perfectly match the hedging instrument’s maturity date.
  • Addition of new disclosure requirements and amendments to existing ones.

Additional Relief Provided by the ASU

Further, additional relief has been provided by the ASU for various aspects of hedge accounting as follows:

  • Certain fair value hedges of interest rate risk:
    • Measurement of hedged item — Option to use either the benchmark interest rate component of total contractual coupon cash flows or the total contractual coupon cash flows to calculate the change in the fair value of the hedged item attributable to changes in the benchmark interest rate.
    • Prepayable financial instruments — Ability to consider only how changes in the benchmark interest rate affect the decision to settle the hedged item before its scheduled maturity.
    • Partial-term hedges — Ability to measure the change in the fair value of the hedged item attributable to changes in the benchmark interest rate by “using an assumed term that begins when the first hedged cash flow begins to accrue and ends when the last hedged cash flow is due and payable.”
    • Portfolio hedge of prepayable assets — Addition of a “last-of-layer” method that enables an entity to fair value hedge a portion of a closed portfolio of prepayable assets (or one or more beneficial interests secured by a portfolio of prepayable financial instruments) without having to consider prepayment risk or credit losses when measuring those assets.
  • Ability to hedge contractually specified components of the price of forecasted purchases and sales of nonfinancial assets.
  • Although private companies that are not financial institutions and certain not-for profit entities would have to document certain aspects of a hedging relationship at hedge inception, they would not have to perform and document hedge effectiveness assessments until their next set of financial statements is available to be issued.

Effective Date and Transition

For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods therein. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. In addition, entities are permitted to early adopt the new guidance in any interim or annual period after issuance of the ASU. If an entity early adopts the updated guidance in an interim period, any transition adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.

FASB project information

For further information on the hedging project, please refer to the FASB's Web site.


Jon Howard
Partner, Deloitte & Touche LLP

Mark Bolton
Director, Deloitte & Touche LLP

Shahid Shah
Partner, Deloitte & Touche LLP


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