At its May 8, 2019, meeting, the FASB reached tentative decisions related to certain implementation issues of ASU 2017-12:¹

Issue 1 — Change in Hedged Risk in a Cash Flow Hedge

The Board agreed with the staff’s recommendation that when an entity applies hindsight “to identify hedged transactions with a revised hedged risk that would not have achieved a highly effective hedging relationship,” it should (1) not reclassify any amounts deferred in accumulated other comprehensive income (AOCI) for the hedging relationship into earnings until the related forecasted transaction affects earnings, (2) recognize any amount reclassified out of AOCI in “the same income statement line item as the earnings effect of the hedged forecasted transaction,” and (3) not characterize the change in hedged risk as a missed forecast. The FASB and its staff believe this guidance will be more consistent with the Board’s earlier decision to consider the hedged risk distinct from the hedged forecasted transaction. Furthermore, this conclusion is consistent with some Board members’ feedback that a missed forecast should only be recognized if there is an actual shortfall in the hedged forecasted transaction (i.e., a change in hedged risk should not trigger recognition of a missed forecast).

The FASB also tentatively decided to:

• Permit entities to identify hedged transactions using hindsight, regardless of whether those transactions affected earnings in a prior reporting period (thereby reversing a tentative decision reached by the FASB at its March 28, 2018, meeting²).
• Require an entity “to establish an accounting policy for identifying hedged transactions with undocumented hedged risks using hindsight.” It was noted that entities should identify hedged transactions using hindsight in a consistent manner for similar hedges.
• Exclude hedges of foreign exchange risk and hedges of credit risk from the scope of the change in hedged risk guidance.

Issue 2 — Contractually Specified Component

The FASB tentatively decided to provide additional guidance regarding:

• “[T]he nature of agreements in which a contractually specified component (CSC) may be evidenced.”
• Clarification that when an entity designates changes in a contractually specified component of the purchase or sale of a nonfinancial asset as the hedged risk, it need only consider whether the “clearly and closely related underlying” portion of the normal purchases and normal sales scope exception has been satisfied.

Issue 3 — Dual Fair Value and Net Investment Hedges

The FASB tentatively decided to realign the recognition and presentation of dual hedging relationships (i.e., hedging relationships in which an entity designates a debt instrument denominated in a foreign currency as both (1) the hedged item in a fair value hedge of interest rate risk and (2) the hedging instrument in a net investment hedge) in response to stakeholder concerns that the amendments made by ASU 2017-12 would reduce the effectiveness of this hedging strategy. Specifically, the Board’s decision would (1) require an entity to “exclude the foreign-currency-denominated debt’s fair value hedge basis adjustment from the effectiveness assessment of the net investment hedge” and (2) prohibit an entity from analogizing to this guidance in other fact patterns.

Issue 4 — Use of the Term “Prepayable” Under the Shortcut Method

To clearly distinguish between the different meanings of “prepayable” in the context of the shortcut method guidance and the amendments to the fair value hedging guidance made by ASU 2017-12, the FASB tentatively decided to clarify the shortcut method guidance “by replacing the term prepayable or prepayment with early settlement and replacing the term prepaid with settled early.” Such clarifications would not affect how an entity applies the shortcut method.

Issue 5 — Effective Date and Transition

The FASB tentatively decided that:

• Entities that have not yet adopted ASU 2017-12 would adopt these additional amendments when they adopt ASU 2017-12.
• For entities that have previously adopted ASU 2017-12:
  • Entities could adopt amendments related to the change in hedged risk and designation of a contractually specified component of purchases or sales of nonfinancial assets either prospectively or retrospectively to the adoption date of ASU 2017-12.
  • An entity would adopt the dual hedge guidance through retrospective application to its adoption date of ASU 2017-12.
  • Additional transition disclosures would be required.

Next Steps

A proposed ASU will be issued in the future.

See the meeting handout and summary of tentative Board decisions for additional information.

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1 FASB Accounting Standards Update (ASU) No. 2017-12, Targeted Improvements to Accounting for Hedging Activities.

2  See Deloitte’s April 10, 2018, journal entry for more information.