FASB proposes major changes to hedge accounting

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12 Jun 2008

The US Financial Accounting Standards Board has published an exposure draft (ED) on Accounting for Hedging Activities – an amendment of FASB Statement 133. If adopted, the new rules would apply for financial years beginning after 15 June 2009, and interim periods within those fiscal years.

Comment deadline is 15 August 2008.

Among other things, the ED proposes to:

  • Eliminate (with two exceptions) the ability of an entity to designate individual risks as the hedged risk in a fair value or cash flow hedge. This would mean that the financial statements would reflect information about the risks in the hedged item or transaction whether or not the entity chooses to manage those risks as part of a particular hedging relationship. The two exceptions would be (a) interest rate risk related to the entity's own issued debt (that is, its liability for funds borrowed), if hedged at inception, and (b) foreign currency exchange risk.
  • Eliminate the 'shortcut method' by which hedge effectiveness is presumed if the 'critical terms' of the hedging instrument and hedged item are deemed to match.
  • Modify the effectiveness threshold necessary for applying hedge accounting from highly effective to reasonably effective at offsetting changes in fair value or variability in cash flows.
  • Require an effectiveness evaluation at inception of the hedging relationship but not require ongoing effectiveness testing unless circumstances suggest a hedge is no longer reasonably effective.
FASB staff will present the ED to the IASB in an education session at the IASB meeting on 18 June 2008. Click for:


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