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Journal entry — FASB votes to finalize ASU on hedging

Published on: Jun 12, 2017

At its June 7, 2017, meeting, the FASB completed deliberations for its project on targeted improvements to the hedge accounting model and voted to proceed with a new Accounting Standards Update (ASU), which it expects to issue in August 2017.

Effective Date and Early Adoption

For public business entities, the ASU will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the ASU will be effective for fiscal years beginning after December 15, 2019, and in interim periods within fiscal years beginning after December 15, 2020. Entities may early adopt the ASU in any interim or annual period after its issuance, and those that adopt in an interim period would recognize the related transition adjustments as of the beginning of the fiscal year that includes the interim period of adoption.

Sweep Issues

The Board addressed sweep issues raised by the staff by:

  • Extending the special private-company hedge documentation timing provisions to not-for-profit entities (“except for [those] that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market”).
  • Agreeing that the scope of the amortization approach for excluded components should be expanded to include net investment hedges of a foreign operation.

Transition Issues

The Board agreed to:

  • Not require an entity to assess or account for the following types of hedging relationships post-adoption in a similar manner to what was done pre-adoption even though they may be “similar” types of hedges:
    • Hedges for which an entity applies the shortcut method.
    • Hedges in which an entity designates the hedged risk as a contractually-specified component of a nonfinancial asset or a contractually-specified interest rate.
    • Hedges for which an entity applies the amortization approach to account for excluded components.
  • Allow an entity, at adoption, to exclude cross-currency basis spreads from the assessment of effectiveness for existing fair value hedges.
  • Clarify that private companies (that are not financial institutions) and not-for-profit entities (“except for [those] that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market”) have until the date their next set of interim (if applicable) or annual financial statements is available to be issued to make transition elections. Other entities “must make those elections before the first effectiveness testing date after adoption.”
  • Provide additional transition relief to entities that modify existing fair value hedges of interest rate risk to measure changes in the fair value of the hedged item on the basis of the benchmark interest rate component cash flows. The basis adjustment associated with any dedesignated portion of the hedge would be recorded as an adjustment to the opening balance of retained earnings at transition and would not need to be amortized into earnings over the remaining life of the hedged item.
  • Grant entities an opportunity, at transition, to transfer held-to-maturity financial assets that qualify as hedged items under the last-of-layer method to the available-for-sale classification.

The Board also voted to permit an entity to perform qualitative assessments on a hedge-by-hedge basis.

Other Items Discussed

At the meeting, the staff also highlighted certain substantive drafting changes that it expects to make to the final ASU, which would add clarifications to and remove inconsistencies with other parts of the Codification. The staff also shared its cost-benefit analysis and its belief that a transition resource group for this project will not be necessary. The Board agreed with that assessment.

For additional information, refer to the press release and the tentative Board decisions on the FASB’s Web site.

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