Posted by Ruth Hardie on February 21st, 2017
In response to comment letters and FASB roundtables the FASB further relaxed effectiveness testing requirements in the proposed derivative accounting update, now permitting preparers to return to qualitative effectiveness testing after there have been changes in facts and circumstances that would require the entity to perform a quantitative effectiveness test.
On February 15th, the FASB re-deliberated the previously proposed prohibition of returning to qualitative effectiveness testing after a change in facts and circumstances. Question 9 in the exposure draft had asked respondents to describe situations where under the proposed rules a subsequent quantitative test would be required, however when tested, the relationship would likely remain highly effective. The question then went on to ask whether respondents felt that an entity should be allowed to return to qualitative testing after such a significant change in facts and circumstances precluded qualitative testing in a prior period.
The response was overwhelmingly in favor of allowing entities to return to qualitative testing. Examples of events that might require a subsequent quantitative test that may return highly effective results, either concurrently or in the future, included temporary market disruptions due to weather events, unpegging of currencies, temporary market shortages of a commodity, a change in the timing of the hedged item and an underlying rate or price beginning to approach a cap or a floor.
During these re-deliberations, the FASB decided that an entity will be allowed to return to a qualitative assessment of hedge effectiveness. The same “principles and factors” should be used to evaluate whether a qualitative testing approach is reasonable both at inception and after a subsequent quantitative test has shown that the relationship is highly effective.
The next meeting is scheduled for March 8th.