PROJECT UPDATE

Codification Improvements—Hedge Accounting

Last updated on July 12, 2022. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Sections updated on the date above are indicated with an asterisk *)

 

Objective:

The objective of this project is to make Codification improvements related to issues discussed at the February 14, 2018 and March 28, 2018 Board meetings, as well as other issues raised by stakeholders.
 

Background:

On August 28, 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which made targeted improvements to the hedge accounting model with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in that Update made certain targeted improvements to simplify the application of hedge accounting guidance in current GAAP on the basis of feedback received from preparers, auditors, users, and other stakeholders.
 
On the basis of questions raised by stakeholders on Update 2017-12, the Board believes that certain Codification improvements should be made. Some minor improvements were addressed as part of Accounting Standards Update No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. Other Codification improvements that require further research are being addressed in this project, including the following:
 
  1. In the February 14, 2018 Board meeting, the Board asked the staff to research potential Codification improvements related to use of the term prepayable under the shortcut method guidance. The use of that term under the shortcut method guidance differs from its usage in the amended guidance in Update 2017-12 related to fair value hedges of interest rate risk, the last-of-layer method, and the application of the transition guidance that allows an entity to transfer financial instruments from the held-to-maturity category to the available-for-sale category.
  2. At the March 28, 2018 Board meeting, the Board asked the staff to obtain external review feedback on Codification improvements to clarify the Board’s intent related to the change in hedged risk guidance for cash flow hedges in paragraph 815-30-35-37A.
 
On the basis of stakeholders' feedback, the Board decided to address the following additional issues:
 
  1. Potential Codification improvements to clarify the Board’s intent regarding the contractually specified component guidance, including the nature of agreements in which a contractually specified component may be evidenced and the applicability of the normal purchases and normal sales scope exception.
  2. Potential Codification improvements to align the recognition and presentation of hedging relationships in which a foreign-currency-dominated debt instrument that is designated as the hedging instrument in a net investment hedge and the hedged item in a fair value hedge of interest rate risk (a dual hedge) to that before the amendments in Update 2017-12 were issued.

Exposure Draft:

On November 12, 2019, the Board issued a proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting. The due date for comment letters was January 13, 2020.
 
  • Download the proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting
  • Read comment letters on the proposed Accounting Standards Update.

  • Read the FASB in Focus, which summarizes the amendments in the proposed Update.

Tentative Board Decisions Reached to Date (as of June 29, 2022)

 

June 29, 2022

 
The Board discussed stakeholder feedback received on Topic 815, Derivatives and Hedging, in response to the June 2021 Invitation to Comment, Agenda Consultation. The Board made no technical decisions and provided suggestions on, and observations about, the focus and prioritization for continued research efforts. That research will be considered at future decision-making meetings.
 

July 31, 2019

 
At the July 31, 2019 Board meeting, the Board discussed proposed amendments to the Codification resulting from stakeholders’ feedback on Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The Board discussed the following topics:
 
Change in Hedged Risk in a Cash Flow Hedge
 
The Board decided the following:
 
  1. An entity would be required to use only its best estimate of the hedged risk when performing the assessment of hedge effectiveness and clarified that the best estimate must be made at the individual transaction level.
  2. An entity would be required to first identify hedged transactions that occur during the hedge period before identifying hedged transactions that occur during the two-month period after the hedge period.
  3. An entity would be required to document its method of identifying hedged transactions using hindsight at hedge inception rather than making the hindsight method an accounting principle subject to Topic 250, Accounting Changes and Error Corrections.
 
Contractually Specified Components
 
The Board decided to add an additional criterion to hedge a contractually specified component in a spot transaction. That criterion would require that the pricing formula that includes the contractually specified component be based on how the price is determined in the nonfinancial asset’s spot market.
 
Private Company Considerations
 
The Board decided not to provide private companies and not-for-profit entities with relief to delay the reassessment of their hedged risk best estimate until their financial statements are available to be issued.
 
Effective Date
 
The Board decided that the proposed amendments would be effective for all entities for fiscal years beginning after December 15, 2020. For public business entities, the proposed amendments would be effective for interim periods within fiscal years beginning after December 15, 2020. For all other entities, the proposed amendments would be effective for interim periods within fiscal years beginning after December 15, 2021. Early adoption would be permitted for all entities on any date on or after issuance of a final Update if the entity has adopted the amendments in Update 2017-12.
 
Analysis of Costs and Benefits
 
The Board decided that:
 
  1. It has received sufficient information and analysis to make an informed decision on the perceived costs of the changes.
  2. Subject to feedback received through the comment letter process, the expected benefits would justify the expected costs of the amendments included in the proposed Update.
 
Next Steps
 
The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot, with a comment period of 60 days.
 

May 8, 2019


At the May 8, 2019 Board meeting, the Board decided to amend the guidance in Topic 815, Derivatives and Hedging, for each of the following topics:
 
Change in Hedged Risk in a Cash Flow Hedge
 
The Board decided that when hindsight is applied to identify hedged transactions with a revised hedged risk that would not have achieved a highly effective hedging relationship:
 
  1. Amounts deferred in accumulated other comprehensive income (AOCI) would remain in AOCI until the associated forecasted transaction affects earnings.
  2. Amounts reclassified from AOCI to earnings would be recognized in the same income statement line item as the earnings effect of the hedged forecasted transaction.
  3. The change in hedged risk would not count as a missed forecast.
 
The Board also decided to:
 
  1. Reverse its tentative decision made at the March 28, 2018 Board meeting that would have allowed an entity to identify only hedged transactions using hindsight if the transactions had not yet affected reported earnings. Instead, all forecasted transactions that occurred would be eligible for identification as hedged forecasted transactions.
  2. Require an entity to establish an accounting policy for identifying hedged transactions with undocumented hedged risks using hindsight. (See reversal of this decision at the July 31, 2019 Board meeting)
  3. Amend the scope of the change in hedged risk guidance to exclude hedges of foreign exchange risk and hedges of credit risk, subject to feedback received on the proposed Accounting Standards Update.
 
Contractually Specified Components
 
The Board decided to clarify:
 
  1. The nature of agreements in which a contractually specified component (CSC) may be evidenced, with an emphasis on the requirement that the CSC would need to be explicitly referenced in those agreements.
  2. The clearly and closely related underlying portion of the normal purchases and normal sales scope exception is the only portion of the exception that would need to be applied for an entity to designate the variability in a CSC as the hedged risk in a nonfinancial purchase or sale agreement that qualifies for hedge accounting.
 
Dual Fair Value and Net Investment Hedge (Dual Hedge Relationship)
 
For dual hedge relationships in which a debt instrument is both a hedging instrument in a net investment hedge in a foreign entity and a hedged item in a fair value hedge of interest rate risk, the Board decided to:
 
  1. Require an exception to the recognition and presentation requirements established by the amendments in Update 2017-12. An entity would be required to exclude the foreign-currency-denominated debt’s fair value hedge basis adjustment from the effectiveness assessment of the net investment hedge.
  2. Clarify that this guidance could not be applied by analogy to any fact pattern outside a dual hedge relationship.
 
Use of the Term Prepayable under the Shortcut Method
 
The Board decided to clarify that the intended meaning of the term prepayable under the shortcut method guidance differs from that under the amended guidance in Update 2017-12 by replacing the term prepayable or prepayment with early settlement and replacing the term prepaid with settled early in the shortcut method guidance.
 
Transition Guidance
 
The Board decided that for entities that have not adopted the amendments in Update 2017-12 before the issuance date a final Accounting Standards Update, the proposed amendments would be adopted in accordance with paragraph 815-20-65-3.
 
The Board decided that the following transition provisions would apply for entities that have adopted the amendments in Update 2017-12 before the issuance date of a final Accounting Standards Update:
 
  1. For Issue 1 on change in hedged risk, an entity would be allowed to apply the proposed amendments on a prospective or retrospective basis. For retrospective application, if an entity reclassified amounts from AOCI to earnings because of a missed forecast between the adoption date of Update 2017-12 and the adoption date of a final Update of these proposed amendments, the entity may apply the change in hedged risk guidance to those hedges to determine whether the forecasted transaction was fulfilled by a revised hedged risk. In those cases, the entity would then adjust the effect on earnings, retained earnings, and AOCI in each period since the adoption of Update 2017-12.
  2. For Issue 2 on contractually specified components, for those forecasted purchases or sales of nonfinancial assets that have been clarified to qualify for contractually specified component risk hedging in accordance with these proposed amendments:
    1. An entity that adopts the amendments in the proposed Update on a retrospective basis would be permitted to amend hedge documentation from hedging overall price risk to contractually specified component risk without dedesignation for hedging relationships:
      1. Existing as of the date of adoption of Update 2017-12 and
      2. Designated between the adoption date of Update 2017-12 and the adoption date of a final Update of these proposed amendments.
    2. An entity that adopts the proposed amendments on a retrospective basis would be permitted to retroactively designate hedging relationships that existed between the adoption date of Update 2017-12 and the adoption date of a final Update of these proposed amendments.
    3. For an entity that adopts the proposed amendments on a prospective basis, the entity would be allowed to amend its documentation without dedesignation for existing hedges as of the date of adoption of a final Update of these proposed amendments from hedging overall price risk to contractually specified component risk.
  3. For Issue 3 on dual hedges, an entity would be required to reclassify to retained earnings or earnings, as appropriate, in the appropriate periods any amounts recorded in AOCI related to the foreign exchange remeasurement of the fair value hedge basis adjustment in the net investment hedge since the date of initial application of Update 2017-12. An entity would be required to amend its documentation of dual hedging relationships without dedesignation to exclude the fair value hedge basis adjustment from the assessment of effectiveness in the net investment hedge. An entity would be permitted to retroactively designate dual hedges for hedging instruments and hedged items that existed between the adoption date of Update 2017-12 and the adoption date of a final Update of these proposed amendments.
  4. For Issue 4 on the use of the term prepayable under the shortcut method, the proposed amendments would have no transition guidance because the proposal does not change the application of the shortcut method.
 
The Board also decided that the transition disclosures would be as follows in the period that the entity adopts these amendments:
 
  1. The nature of and reason for the change in accounting principle.
  2. The method of applying the change.
  3. The effect of the adoption on any line item in the statement of financial position, if material, as of the beginning of the first period for which the amendments are effective. Presentation of the effect on financial statement subtotals would not be required.
  4. The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first period for which the amendments are effective.
 
An entity that issues interim financial statements would provide the disclosures in each interim financial statement of the fiscal year of change and the annual financial statements of the fiscal year of change.
 

March 28, 2018

 
Technical inquiries received related to the change in hedged risk concept in paragraph 815-30-35-37A. That paragraph allows an entity to retain hedge accounting when the hedged risk in a cash flow hedge changes and the derivative designated as the hedging instrument remains highly effective. The staff presented feedback from those inquiries and potential Codification improvements to address the issues raised.
 
Those improvements could include clarifications that:
 
  1. The hedged forecasted transaction and hedged risk are distinct.
  2. The hedged risk may change, and an entity may retain hedge accounting if the revised hedging relationship is highly effective even if a distinction is not made between the hedged forecasted transaction and the hedged risk in an entity’s hedge documentation.
  3. The hedged forecasted transaction may not be documented so broadly such that if a change in hedged risk occurs, it does not share the same risk exposure as the originally designated hedged forecasted transaction.
  4. If the hedging relationship based on the revised hedged risk is not highly effective, the entity must cease hedge accounting but amounts previously recorded in accumulated other comprehensive income remain until the hedged forecasted transaction affects earnings if the forecasted transaction is still probable of occurring. That wording already is included in Example 9 of Subtopic 815-30 but may be added to other sections of that Subtopic.
  5. Hindsight may be applied in identifying transactions as hedged transactions. However, an entity must first identify transactions as hedged transactions based on the originally documented hedged risk. Only when there are no transactions or insufficient transactions based on the originally documented hedged risk may the entity consider transactions based on other risks.
  6. If a transaction occurred in a prior reporting period, it may be retrospectively identified as a hedged transaction if it has not yet affected reported earnings. (See reversal of this decision at the May 8, 2019 Board meeting).
 
The Board asked the staff to obtain external review feedback on Codification improvements to clarify the Board’s intent related to the change in hedged risk guidance for cash flow hedges in paragraph 815-30-35-37A.
 

February 14, 2018

 
In the February 14, 2018 Board meeting, the Board asked the staff to research potential Codification improvements related to use of the term prepayable under the shortcut method guidance. The use of that term under the shortcut method guidance differs from its usage in the amended guidance in Update 2017-12 related to fair value hedges of interest rate risk, the last-of-layer method, and the application of the transition guidance that allows an entity to transfer financial instruments from the held-to-maturity category to the available-for-sale category.

The Board meeting minutes, handouts, and videos are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
 
The following are links to the minutes for each meeting. To view Board meetings and handouts from the past 90 days, click here.
 
June 29, 2022* Board Meeting—Discussion on stakeholder feedback received on Topic 815, Derivatives and Hedging, in response to the June 2021 Invitation to Comment, Agenda Consultation.
July 31, 2019 Board Meeting—Discussion on the proposed amendments to the Codification resulting from stakeholder feedback on Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
May 8, 2019 Board Meeting—Discussion on the proposed amendments to the Codification resulting from stakeholder feedback on Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
March 28, 2018 Board Meeting—Discussion on the change in hedged risk in cash flow hedges.
February 14, 2018 Board Meeting—Discussion on the use of the term prepayable under the shortcut method.

The Board will consider comment letter feedback on the proposed Update.

Kenjiro Matsuo
Project Manager
kmatsuo@fasb.org

Chase Hodges
Practice Fellow
chodges@fasb.org

Rosemarie Sangiuolo
Project Consultant
rsangiuolo@fasb.org

Matthew Shea
Postgraduate Technical Assistant
mshea@fasb.org

Lindsey Hoyer
Postgraduate Technical Assistant
lhoyer@fasb.org

The staff has prepared this summary for information purposes only. Any Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
 

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