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FASB Deliberates Hedge Accounting as Part of Accounting for Financial Instruments Project

Published on: 10 Mar 2010

Today, the FASB voted unanimously to incorporate the proposals made in the June 6, 2008, exposure draft Accounting for Hedging Activities into the joint financial instruments project. The exposure draft for the financial instruments project is expected to be issued in the first quarter of 2010. Unlike the 2008 exposure draft, the proposed hedge accounting model will retain the bifurcation-by-risk approach for financial items. Key features of the tentative hedge accounting model are as follows:

  • Entities would be required to perform a qualitative (rather than quantitative) test at hedge inception to demonstrate that an economic relationship exists between the hedging instrument and the hedged item. Quantitative analysis may be necessary in certain situations.
  • Entities would need to demonstrate that a hedging relationship is “reasonably effective” rather than “highly effective.”
  • Entities would need to perform a qualitative assessment (quantitative, if necessary) of hedge effectiveness after inception of the hedging relationship only when facts and circumstances suggest that the hedging relationship may no longer be reasonably effective.
  • The shortcut and critical-terms-match methods would be eliminated.
  • Hedge accounting would be discontinued only if the hedging criteria are not met or when the hedging instrument expires or is sold, terminated, or exercised.

The FASB also decided that the proposed hedging model should apply to all entities as of the effective date of the financial instruments standard.

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