On May 26, 2010, the FASB issued an Exposure Draft (ED) on their proposed amendment to accounting for financial instruments and accounting for derivative instruments and hedging activities. The ED addresses various topics including the classification of financial assets and liabilities, impairment rules, and hedge accounting. This edition of Bullet Proof will be limited to a review of hedge accounting changes.
It is expected that the final guidance will be issued in the first half of 2011 with an effective date no earlier than January 1, 2013. The comment period ends on September 30, 2010.
Exposure Draft at a Glance
-Short-cut and critical terms match methods eliminated
-Threshold for hedge effectiveness changes from highly effective to reasonably effective
-Only qualitative testing required at hedge inception; no ongoing test unless circumstances suggest a change
-For cash flow hedges, ineffectiveness is measured for both over and under hedging
-Voluntary dedesignations no longer allowed
-Option time value (premium) must be amortized into earnings over the life of the option
-No change to types of items, transactions, and risks eligible for hedge accounting
-Bifurcation of risk is still allowed (e.g. hedge of benchmark interest rate)