FASB reaches tentative decisions on proposed improvements to hedge accounting

Published on: 05 Aug 2019

At its July 31, 2019, meeting, the FASB reached tentative decisions related to proposed Codification improvements to the hedge accounting guidance. The Board discussed the following topics:

  • Sweep issues related to the guidance on (1) changes in the hedged risk in a cash flow hedge and (2) contractually specified components.
  • Considerations specific to private companies.
  • Effective date of proposed changes.

Summaries of the Board’s deliberations are provided below.

Sweep Issues

Change in the Hedge Risk in a Cash Flow Hedge

As indicated in the summary of the tentative Board decisions, the FASB decided that:

  • An entity that performs a prospective assessment of hedge effectiveness for a cash flow hedge would only need to use its best estimate of the hedged risk (and not all other potential hedged risks). The best estimate would be determined at the individual transaction level (i.e., not at a portfolio level).
  • When a change in hedged risk occurs, an entity “would be required to first identify hedged transactions that occur during the hedge period before identifying hedged transactions that occur during the two-month period after the hedge period.”
  • An entity’s method of using hindsight to identify hedged transactions when a change in hedged risk occurs would not be considered an accounting principle election under ASC 2501 but instead would be included in the hedge documentation prepared at hedge inception. Accordingly, an entity that subsequently changes its identification method to an improved method would not be required to demonstrate preferability under ASC 250.

Contractually Specified Components

The Board also tentatively decided that an entity that hedges a contractually specified component in a spot transaction would need to demonstrate that “the pricing formula that includes the contractually specified component [is] based on how the price is determined in the nonfinancial asset’s spot market.”

Private Company Relief Considerations

The FASB tentatively decided not to allow private companies and not-for-profit entities to delay their reassessment of their best estimate hedged risk until their financial statements are available to be issued. Accordingly, such entities would be required to reassess the hedged risk best estimate at each quarterly subsequent hedge effectiveness assessment date.

Effective Date

The proposed amendments would be effective:

  • For public business entities, for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.
  • For all other entities, for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

For entities that have adopted ASU 2017-12,2 early adoption would be permitted at any time after issuance of the ASU.

Next Steps

The Board expects to issue a proposed ASU in the upcoming months. The proposed ASU will have a 60-day comment period.

For more information on the topics discussed, see the meeting handout.


1 FASB Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections.

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

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