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FASB Non-Decision Meeting Recap: May 27, 2015

The Financial Accounting Standards Board’s (FASB) non-decision meeting this Wednesday, May 27, featured two hours on hedge accounting — including discussions on ineffectiveness, disclosures and documentation.

FASBThe main theme of ineffectiveness was where to book it, and the FASB staff presented three different options:

  1. Requiring ineffectiveness to be booked to the same line item as the effective hedge amount
  2. Requiring ineffectiveness to be booked to the same line item as non-designated hedges
  3. Leaving the decision of where to book ineffectiveness in the hands of management (the current state)

While mainly centered on where ineffectiveness should be booked, the discussion also swirled around when it should be booked. The board seemed to come to a consensus that the where and the when are interrelated; they will likely be considered together at the next FASB meeting.

Two separate disclosure modifications were considered. The first, if passed, would add additional disclosures for fair value hedges; this would provide financial statement users with more information on the hedged item. The second proposal is applicable to both cash flow and fair value hedge accounting; it would change P&L disclosures to shift the focus to financial statement line items and away from derivative instruments disaggregated by risk.

The proposal reviewed would break line item results into four pieces; however the board is concerned that this level of disaggregation may be cost prohibitive. Some board members feel that the same results could be achieved with a table showing the effects of hedging and the line item total combined with qualitative disclosures about what is hedged. They are looking for increased transparency on what companies are hedging and how much of their risk they are hedging — for example, fuel is 50 percent of COGS and 75 percent of the fuel is hedged.

The final topic was documentation. The staff recommendation included no changes to current documentation content with an extension of time to complete the quantitative effectiveness testing beyond 24-48 hours. Discussion was mixed, and touched not only on timing, but also on content and whether documentation should even be required. The clear objective is to prove that you are qualified, and most board members appeared to be in favor of a minimalist approach combined with an extension of time to complete the quantitative analysis. Dynamic hedging was discussed briefly prior to the close of the meeting and may ultimately put a kink in the minimalist approach.

We will continue to monitor FASB meetings and keep you posted on upcoming changes to hedge accounting. Video of this meeting is available here.