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FASB Non-Decision Meeting Recap: June 10, 2015

The second part of FASB’s non-decision making meeting on June 10, 2015 was used to briefly discuss the overall changes to hedge accounting.

FASBThree main topics were covered:

  • Non-Financial Hedges
  • Financial Instrument Hedges
  • Shortcut Hedge Accounting

The Non-Financial Hedges section included the following three proposals:

Proposal 1 Proposal 2A Proposal 2B
  • Reasonably effective
  • 60%-167%
  • Total price risk
  • FX risk remains at highly effective
  • Highly effective
  • Allow component hedging (contractually specified)
  • Highly effective
  • Allow component hedging (market convention)
The following changes are included in all three proposals:

  • Eliminate ineffectiveness
  • Changes in cash flow booked to OCI
  • Changes in fair value booked to line item hedged
  • Additional disclosures required
  • Quantitative test – day 1 (before or at 3 month testing period)
  • Qualitative testing subsequently unless facts and circumstances have changed
  • Voluntary dedesignation allowed

 

The Financial Instrument Hedges proposals included the ability to designate the contractually specified variable rate as the risk hedged (which would eliminate benchmark requirements for cash flow hedging). Most of the focus was on fair value hedges total coupon and partial term hedging. The discussion centered on whether under users will be allowed to just look at changes in fair value due to changes in the benchmark rate (as opposed to the total coupon required now).

Two of the proposals included retaining the current list of benchmark rates and adding one new rate – SIFMA, which is a tax-exempt rate whereas the third proposal would open up the definition of a benchmark rate. All proposals include partial term fair value hedge accounting. Finally, the proposals differ on how callable debt is handled (either as it relates to changes in benchmark interest rate only or current guidance which is interpreted to require an entity to consider all the factors that might lead to prepayment of the debt).

There are three different alternatives being considered for Shortcut Hedge Accounting:

1. Add implementation guidance that includes hedges with trivial differences that are NOT disqualified. List would not be comprehensive.

2. Amend shortcut to matching and document that trivial differences are allowed.

3. Allow long-haul hedge accounting if shortcut was used and it’s later determined that shortcut was not appropriate. Would have to test as of inception and currently to show that it was expected to be highly effective and it continues to be highly effective. Different combinations of the above 2 points are on the table, in addition to leaving shortcut as-is and eliminating shortcut hedge accounting altogether.

Click here to watch a webcast of the meeting or read more about part II. 

Stay posted for decisions, which are expected on July 1, 2015.