Topic 815: Cash Flow Hedge Accounting Affected by the COVID-19 Pandemic

 

Purpose of This Staff Q&A

This FASB staff question-and-answer document (Q&A) focuses on the application of the guidance in Topic 815, Derivatives and Hedging, in relation to the effects of the Coronavirus Disease 2019 (also referred to as COVID-19 pandemic) on cash flow hedge accounting. This Q&A does not address other regulatory rules or compliance requirements that entities may need to consider when preparing and issuing financial statements.

Topic 815 provides guidance on when to discontinue cash flow hedge accounting and when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings. Questions have been posed to the staff on how the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic should be considered when applying cash flow hedge accounting in accordance with Topic 815. As part of the Board’s continuing commitment to educate stakeholders and to provide interpretive guidance on accounting issues during a global economic crisis resulting from an unprecedented pandemic, the FASB staff has developed this Q&A to respond to some frequently asked questions about the disruptive effects of COVID-19 on cash flow hedge accounting. The responses provided in this Q&A should not be analogized to other facts and circumstances not specifically discussed.

The FASB staff developed this Q&A based on the information and feedback received from various stakeholders through the date on which this Q&A has been issued. The FASB staff will continue to monitor this unique and evolving situation and communicate with the industry as this situation unfolds, including through additional statements, technical inquiries, and other means, as appropriate. This Q&A represents the view of the FASB staff. Official positions of the FASB are determined only after extensive due process and deliberation.
 

Questions and Answers

 

Question 1

In accordance with paragraph 815-30-40-4, if cash flow hedge accounting is discontinued, amounts deferred in AOCI should remain in AOCI unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within a two-month period of time thereafter. In rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity may cause the forecasted transaction to be probable of occurring at a date that is beyond that additional two-month period. In those cases, amounts deferred in AOCI should remain in AOCI until the forecasted transaction affects earnings. That is, in those rare cases, an entity should disregard the timing restrictions otherwise applicable to the forecasted transaction and continue to defer amounts previously reported in AOCI until the forecasted transaction affects earnings.

When cash flow hedge accounting has been discontinued, may delays in the timing of the forecasted transactions related to the effects of the COVID-19 pandemic be considered rare cases caused by extenuating circumstances outside the control or influence of an entity?

Response

The FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic. That determination will require judgment based on facts and circumstances. Consequently, for affected dedesignated hedges, if the forecasted transaction is probable of occurring after the additional two-month period, an entity should continue to retain amounts previously reported in AOCI associated with that forecasted transaction until that forecasted transaction affects earnings. However, that exception only applies to situations in which the forecasted transaction remains probable of occurring. When applying the exception, an entity should consider whether the forecasted transaction remains probable over a time period that is reasonable given the nature of the entity’s business, the nature of the forecasted transaction, and the magnitude of the disruption to the entity’s business related to the effects of the COVID-19 pandemic.  If an entity determines that it is no longer probable that the forecasted transaction will occur within that reasonable time period beyond the additional two-month period, that exception would not apply and amounts previously reported in AOCI should be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.

Question 2

Paragraph 815-30-40-5 states that a pattern of determining that forecasted transactions are probable of not occurring would call into question an entity’s ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions.

If an entity determines that amounts deferred in AOCI should be reclassified to earnings in accordance with paragraph 815-30-40-5 because of missed forecasts related to the effects of the COVID-19 pandemic, should those missed forecasts be considered when determining whether the entity has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions?

Response

Given the unprecedented nature of the pandemic, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. The FASB staff believes that this guidance did not contemplate forecasts changing so rapidly as a result of a pandemic. Determining whether the missed forecast is related to the effects of the COVID-19 pandemic will require judgment based on facts and circumstances. If an entity determines that a missed forecast is related to the effects of the COVID-19 pandemic, the entity would continue to account for those missed forecasts in accordance with paragraph 815-30-40-5 and disclose the associated amounts in accordance with paragraph 815-10-50-4C(f) (if the entity has adopted the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities) or paragraph 815-30-50-1(e) (if the entity has not yet adopted the amendments in that Update).