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FASB: Momentum for Hedge Accounting Change Continues

Momentum for changes to hedge accounting continued in last week’s FASB meeting. The board discussed aspects of net investment hedging, cash flow hedging and fair value hedging. Tentative decisions were reached as follows:

  • Time value may continue to be excluded from effectiveness for Cash Flow and Net Investment hedges. For Cash Flow hedges, the gain/loss excluded must be recognized in the same P&L line as the hedged item. No direction will be given on income statement geography of Net Investment excluded components.
  • Ineffectiveness for underhedging of net investments would be eliminated by recording all of the effective changes to CTA
  • In Fair Value hedging, users would be allowed to either use the benchmark component or the total coupon UNLESS the effective interest rate on the instrument is less than the benchmark in which case ONLY the total coupon method may be used.
  • The requirements around contract features that limit exposures of non-financial items would be loosened such that a cap, floor or negative basis associated with the price of a contractually specified component would potentially impact the assessment of effectiveness but would not preclude hedge accounting.

FASB’s summary of tentative board decisions can be found here.

Next steps include developing a draft, reviewing cost benefit and complexity analysis, determining the transition approach and deciding upon a comment period.

Also discussed at the same meeting was fair value measurement. The board is close to revising some of the level 3 fair value measurement disclosures. The revision is mostly clarifications and some minor additions. The proposed changes will be exposed for 75 days or until February 29, 2016, whichever is longer.