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Journal entry — FASB makes additional tentative decisions related to hedging

Published on: Oct 16, 2015

The FASB recently met and made additional tentative decisions regarding its project to improve the hedge accounting model. The Board decided that:

  • Net investment hedges should be accounted for in a manner similar to the FASB’s tentative decisions about cash flow and fair value hedges. For highly effective hedging relationships, the change in the hedging instrument’s fair value that an entity would consider to assess hedge effectiveness would initially be recorded, in its entirety, as part of the cumulative-translation adjustment in other comprehensive income (OCI). When the hedged item affects earnings, the amount in accumulated OCI would be reclassified to the same income statement line as the earnings effect of the hedged item. Any portion of the hedging instrument’s change in fair value that is excluded from the entity’s hedge effectiveness assessment would continue to be recognized immediately in income.
  • Any portion of the change in fair value of a hedging instrument that is excluded from an entity’s hedge effectiveness assessment for a cash flow hedge would continue to be recognized immediately in income; however, such amounts would be required to be presented on the same income statement line as the earnings effect of the hedged item.
  • For fair value hedges of benchmark interest rate risk, an entity would have the option to calculate the change in the fair value of the hedged item attributable to changes in the benchmark interest rate by using either (1) total coupon cash flows or (2) only those cash flows related to the benchmark interest rate; however, an entity must use option (1) when the effective interest rate of the hedged item is less than the benchmark interest rate on the date of hedge designation.
  • The existence of a cap, floor, or negative basis in the variable pricing of a contractually specified component of a nonfinancial item would not preclude designation of that component as a hedged item; however, an entity would need to consider such pricing features in its assessment of hedge effectiveness.

All tentative decisions are subject to change in future deliberations. The Board expects to issue a proposed Accounting Standards Update related to this project in the first quarter of 2016.


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