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FASB Discusses Hedge Accounting Transition

In the latest development leading up to FASB’s highly anticipated Accounting Standards Update dealing with hedge accounting, the Board has discussed and made tentative decisions on several transition items.

First, early adoption will be permitted at the beginning of any fiscal period before the effective date. An entity would be required to adopt all of the amendments at one date.

Transition Alternatives: The Board decided that an entity would apply either a modified retrospective approach or a retrospective approach as of the adoption date to hedging relationships existing at that date.

Transition Disclosures: The Board decided that, upon adoption, an entity will be required to disclose the nature and reason for the change in accounting principle and the cumulate effect of the change on the opening balance of retained earnings. If an entity elects to use a retrospective approach, it will be required to provide a description of the prior-period information that has been retrospectively adjusted and the cumulate effect of the change on the opening balance of retained earnings.

Transition Elections at Adoption: The Board decided to allow an entity to make one of three one-time elections upon adoption:

  • Amending hedge documentation for existing hedging relationships to specify how subsequent assessments of effectiveness would be performed qualitatively
  • Amending existing shortcut hedge documentation to incorporate a description of how a quantitative assessment of effectiveness would be performed if it is determined at a later date that use of the shortcut method is no longer appropriate
  • To reset the hypothetical derivative to be at-market as of the original hedge inception date

Additional Considerations: Several other transition-related conclusions were reached, including recording the change in measurement methodology for hedged items in fair value hedges of IR risk, treatment of SIFMA municipal swaps now included the definition of benchmark interest rate for fair value hedges, and the decision to not provide a one-time adjustment for partial-term fair value hedging.

In addition, entities will be exempt from providing disclosures on basis adjustment amounts for fair value hedges, and qualitative information and quantitative goals for the periods before adoption.

Listed next steps are issuance of the redline draft of the proposed ASU (latest estimate is end of Q2) and solicitation of feedback. At that point, the project team will discuss the feedback and the costs and benefits of adoption with the Board.

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