The ED also addresses new criteria involving dedesignation. Entities would no longer be permitted to arbitrarily discontinue hedge accounting by simply removing the designation of a hedging relationship. Instead, the hedging relationship can only be discontinued if the qualifying criteria for designating a hedging relationship are no longer met or if the hedging instrument expires or is sold, terminated, or exercised.
The goal of this new guidance is increased comparability and transparency in the financial statements. The Board believes that “because the economics of the relationship between the hedging instrument and hedge item have not changed, the accounting should not change”, thus encouraging entities to only dedesignate for actual economic transactions.
This could potentially create a problem for FX hedgers. Audit firms disagree on whether the actual booking of a previously forecasted non-functional currency transaction qualifies for automatic dedesignation because the criteria for designating a hedge relationship are no longer met. If the derivative designation doesn’t change when the nature of the hedged item changes (from anticipated to recorded), cash flow hedgers will need to execute two different hedges for a single economic exposure: a cash flow hedge through booking and a remeasurement hedge from booking to cash conversion.
This may also effect Fair Value hedges of commodities or net investments in subsidiaries where the underlying changes and hedged proportions are changed.