Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
Wednesday, October 11, 2023 FASB Board Meeting
Topic 815—hedge accounting improvements. The Board discussed comment letter feedback on proposed amendments related to two issues included in the 2019 proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting—Dual Hedging Relationships and Use of the Term Prepayable in the Shortcut Method. The Board also discussed a third issue that arose as a result of the cessation of LIBOR—Net Written Options as Hedging Instruments. The Board reached the following decisions on those issues.
Dual Hedging Relationships
The Board decided to affirm the proposed amendments to eliminate the recognition and presentation mismatch related to dual hedges, in which a foreign-currency-denominated debt instrument is designated as both a hedging instrument in a net investment hedge and a hedged item in a fair value hedge, that resulted from the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The proposed amendments would eliminate that mismatch by requiring an entity to exclude the foreign-currency-denominated debt instrument’s fair value hedge basis adjustment from the net investment hedge effectiveness assessment. As a result, an entity would immediately recognize the gains and losses from the remeasurement of the debt instrument’s fair value hedge basis adjustment at the spot exchange rate in earnings. Entities would be prohibited from applying this guidance by analogy to other circumstances.
Use of the Term Prepayable in the Shortcut Method
The Board decided not to affirm the proposed amendments to replace the term prepayable with early settlement feature for purposes of applying the shortcut method guidance.
Net Written Options as Hedging Instruments
The Board decided to amend the guidance for applying the written option test when the designated hedging instrument in a cash flow hedge is a compound derivative made up of a written option and a non-option derivative. The amendment would permit entities to assume that certain terms of the hedged forecasted transactions match those of the hedging instrument for purposes of applying that test.
Next Steps
The Board will meet in the future to discuss the remaining three issues in the scope of the project: Change in Hedged Risk of a Cash Flow Hedge, Contractually Specified Components in Cash Flow Hedges of Nonfinancial Forecasted Transactions, and Shared Risk Assessment in Cash Flow Hedges of Loan Portfolios.
Accounting for environmental credit programs. The Board discussed staff research and outreach performed since the project was added to the Board’s technical agenda on scope and asset recognition and measurement. The Board made the following decisions.
Asset Scope
The Board decided that an item that meets the following definition of an environmental credit would be within the scope of the project:
An enforceable right that is acquired, internally generated, or granted by a regulatory agency or its designees that meets all of the following:
The Board decided to clarify that the existence of active markets would not be a consideration for determining whether a credit is separately transferable in an exchange transaction.
The Board decided not to change the accounting requirements for nontransferable credits that meet all of the other criteria in the environmental credit definition.
The Board decided that the acquisition of environmental credits from related parties would be within the project’s scope.
Liability Scope
The Board decided that an obligation that meets the following definition of an environmental credit obligation would be within the scope of the project:
An obligation arising from existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits.
The Board also decided that obligations within the scope of Subtopic 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations, are not environmental credit obligations regardless of whether those obligations can be settled using environmental credits.
Asset—Recognition
The Board decided that an entity would recognize an asset for an environmental credit when it is probable that the credit will be used to settle an environmental credit obligation or separately transferred in an exchange transaction (for example, sold or traded). Costs incurred to obtain all other environmental credits would be recognized as an expense when incurred unless the costs are included in the carrying amount of another asset in accordance with other GAAP.
Asset—Initial Measurement
The Board decided that an entity would initially measure environmental credits, other than those obtained through a grant from a regulator or its designees or internally generated by the entity, in accordance with paragraphs 805-50-30-1 through 30-4, unless those environmental credits were obtained as part of a transaction subject to other GAAP.
The Board decided that an entity would initially measure environmental credits (1) obtained through a grant from a regulator or its designees or (2) internally generated by the entity at cost, limited to transaction costs, if any, associated with obtaining the environmental credit.
Asset—Subsequent Measurement
The Board decided that an entity would not remeasure environmental credits that are probable of being used to settle environmental credit obligations (hereinafter referred to as compliance environmental credits).
The Board decided that an entity would subsequently measure environmental credits recognized as assets that are not compliance environmental credits (hereinafter referred to as noncompliance environmental credits) at historical cost, less impairment losses, if any. The Board also decided that noncompliance environmental credits would be tested for impairment at the end of each reporting period. An entity would recognize an impairment loss when the carrying value of the noncompliance environmental credit exceeds its fair value, measured as the excess of the carrying value over fair value. Subsequent reversal of a previously recognized impairment loss would be prohibited.
Asset—Costing Methods
The Board decided to allow an entity to use average cost, first-in, first-out (FIFO), and specific identification costing methods and to require an entity to consistently apply the costing method to similar environmental credits.
Asset—Portfolio Approach
The Board decided to allow an entity to use a portfolio approach for similar environmental credits for applying the asset recognition and measurement requirements. An entity would be required to establish an accounting policy for using a portfolio approach and apply that policy consistently.
Asset—Derecognition
The Board decided that for a transfer of an environmental credit in a contract with a customer, an entity would derecognize an environmental credit in accordance with Topic 606, Revenue from Contracts with Customers. The Board also decided that a transfer of an environmental credit in a contract with a noncustomer would be derecognized in accordance with Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, unless a scope exception from that Subtopic applies.
Asset—Recognition Reassessment Requirements
The Board decided that at each reporting period an entity would be required to reassess whether it is probable that an environmental credit will be used to settle an environmental credit obligation or transferred in an exchange transaction. An entity would be required to perform that reassessment before applying the corresponding subsequent measurement requirements. For environmental credits an entity previously determined were not probable of being used to settle an environmental credit obligation or separately transferred in an exchange transaction, the Board decided that an entity would be prohibited from subsequently recognizing those environmental credits as assets.
The Board decided that for situations in which an entity determines that an environmental credit is no longer probable of being used to settle an environmental credit obligation or transferred in an exchange transaction, an entity would be required to derecognize the environmental credit through earnings, unless those costs are required to be included in the carrying amount of another asset in accordance with other GAAP.
Asset—Measurement Reassessment Requirements
The Board decided that at each reporting period date, an entity would be required to reassess whether it is probable that an environmental credit recognized as an asset will be used to settle an environmental credit obligation. If, based on that reassessment, an entity reclassifies an environmental credit from a compliance environmental credit to a noncompliance environmental credit or vice versa, an entity would be required to test that environmental credit for impairment before applying the corresponding subsequent measurement guidance.
Wednesday, October 11, 2023 FASB Board Meeting
Topic 815—hedge accounting improvements. The Board discussed comment letter feedback on proposed amendments related to two issues included in the 2019 proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting—Dual Hedging Relationships and Use of the Term Prepayable in the Shortcut Method. The Board also discussed a third issue that arose as a result of the cessation of LIBOR—Net Written Options as Hedging Instruments. The Board reached the following decisions on those issues.
Dual Hedging Relationships
The Board decided to affirm the proposed amendments to eliminate the recognition and presentation mismatch related to dual hedges, in which a foreign-currency-denominated debt instrument is designated as both a hedging instrument in a net investment hedge and a hedged item in a fair value hedge, that resulted from the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The proposed amendments would eliminate that mismatch by requiring an entity to exclude the foreign-currency-denominated debt instrument’s fair value hedge basis adjustment from the net investment hedge effectiveness assessment. As a result, an entity would immediately recognize the gains and losses from the remeasurement of the debt instrument’s fair value hedge basis adjustment at the spot exchange rate in earnings. Entities would be prohibited from applying this guidance by analogy to other circumstances.
Use of the Term Prepayable in the Shortcut Method
The Board decided not to affirm the proposed amendments to replace the term prepayable with early settlement feature for purposes of applying the shortcut method guidance.
Net Written Options as Hedging Instruments
The Board decided to amend the guidance for applying the written option test when the designated hedging instrument in a cash flow hedge is a compound derivative made up of a written option and a non-option derivative. The amendment would permit entities to assume that certain terms of the hedged forecasted transactions match those of the hedging instrument for purposes of applying that test.
Next Steps
The Board will meet in the future to discuss the remaining three issues in the scope of the project: Change in Hedged Risk of a Cash Flow Hedge, Contractually Specified Components in Cash Flow Hedges of Nonfinancial Forecasted Transactions, and Shared Risk Assessment in Cash Flow Hedges of Loan Portfolios.
Accounting for environmental credit programs. The Board discussed staff research and outreach performed since the project was added to the Board’s technical agenda on scope and asset recognition and measurement. The Board made the following decisions.
Asset Scope
The Board decided that an item that meets the following definition of an environmental credit would be within the scope of the project:
An enforceable right that is acquired, internally generated, or granted by a regulatory agency or its designees that meets all of the following:
- Lacks physical substance and is not a financial asset (as defined in the Master Glossary of the Codification)
- Is represented to prevent, control, reduce, or remove emissions or other pollution
- Is separately transferable in an exchange transaction
- Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.
The Board decided to clarify that the existence of active markets would not be a consideration for determining whether a credit is separately transferable in an exchange transaction.
The Board decided not to change the accounting requirements for nontransferable credits that meet all of the other criteria in the environmental credit definition.
The Board decided that the acquisition of environmental credits from related parties would be within the project’s scope.
Liability Scope
The Board decided that an obligation that meets the following definition of an environmental credit obligation would be within the scope of the project:
An obligation arising from existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits.
The Board also decided that obligations within the scope of Subtopic 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations, are not environmental credit obligations regardless of whether those obligations can be settled using environmental credits.
Asset—Recognition
The Board decided that an entity would recognize an asset for an environmental credit when it is probable that the credit will be used to settle an environmental credit obligation or separately transferred in an exchange transaction (for example, sold or traded). Costs incurred to obtain all other environmental credits would be recognized as an expense when incurred unless the costs are included in the carrying amount of another asset in accordance with other GAAP.
Asset—Initial Measurement
The Board decided that an entity would initially measure environmental credits, other than those obtained through a grant from a regulator or its designees or internally generated by the entity, in accordance with paragraphs 805-50-30-1 through 30-4, unless those environmental credits were obtained as part of a transaction subject to other GAAP.
The Board decided that an entity would initially measure environmental credits (1) obtained through a grant from a regulator or its designees or (2) internally generated by the entity at cost, limited to transaction costs, if any, associated with obtaining the environmental credit.
Asset—Subsequent Measurement
The Board decided that an entity would not remeasure environmental credits that are probable of being used to settle environmental credit obligations (hereinafter referred to as compliance environmental credits).
The Board decided that an entity would subsequently measure environmental credits recognized as assets that are not compliance environmental credits (hereinafter referred to as noncompliance environmental credits) at historical cost, less impairment losses, if any. The Board also decided that noncompliance environmental credits would be tested for impairment at the end of each reporting period. An entity would recognize an impairment loss when the carrying value of the noncompliance environmental credit exceeds its fair value, measured as the excess of the carrying value over fair value. Subsequent reversal of a previously recognized impairment loss would be prohibited.
Asset—Costing Methods
The Board decided to allow an entity to use average cost, first-in, first-out (FIFO), and specific identification costing methods and to require an entity to consistently apply the costing method to similar environmental credits.
Asset—Portfolio Approach
The Board decided to allow an entity to use a portfolio approach for similar environmental credits for applying the asset recognition and measurement requirements. An entity would be required to establish an accounting policy for using a portfolio approach and apply that policy consistently.
Asset—Derecognition
The Board decided that for a transfer of an environmental credit in a contract with a customer, an entity would derecognize an environmental credit in accordance with Topic 606, Revenue from Contracts with Customers. The Board also decided that a transfer of an environmental credit in a contract with a noncustomer would be derecognized in accordance with Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, unless a scope exception from that Subtopic applies.
Asset—Recognition Reassessment Requirements
The Board decided that at each reporting period an entity would be required to reassess whether it is probable that an environmental credit will be used to settle an environmental credit obligation or transferred in an exchange transaction. An entity would be required to perform that reassessment before applying the corresponding subsequent measurement requirements. For environmental credits an entity previously determined were not probable of being used to settle an environmental credit obligation or separately transferred in an exchange transaction, the Board decided that an entity would be prohibited from subsequently recognizing those environmental credits as assets.
The Board decided that for situations in which an entity determines that an environmental credit is no longer probable of being used to settle an environmental credit obligation or transferred in an exchange transaction, an entity would be required to derecognize the environmental credit through earnings, unless those costs are required to be included in the carrying amount of another asset in accordance with other GAAP.
Asset—Measurement Reassessment Requirements
The Board decided that at each reporting period date, an entity would be required to reassess whether it is probable that an environmental credit recognized as an asset will be used to settle an environmental credit obligation. If, based on that reassessment, an entity reclassifies an environmental credit from a compliance environmental credit to a noncompliance environmental credit or vice versa, an entity would be required to test that environmental credit for impairment before applying the corresponding subsequent measurement guidance.