Last updated on November 18, 2021. 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 expand the existing last-of-layer fair value hedging method from a single-layer model to a multiple-layer model and clarify the accounting for and disclosure of basis adjustments.
Background:One of the major changes to the hedge accounting guidance made in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities, was the addition of the last-of-layer method. For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, the last-of-layer method allows an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. Under this designation, prepayment risk is not incorporated into the measurement of the hedged item.
Following the issuance of Update 2017-12, stakeholders raised issues around the implementation of the last-of-layer method. Specifically, they asked:
- How and when is an entity permitted or required to allocate the last-of-layer basis adjustment to the individual assets within the closed pool?
- Is it permissible for an entity to employ a multiple-layer hedging strategy for a single closed portfolio?
Exposure Draft:On May 5, 2021, the Board issued a proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The due date for comment letters was July 5, 2021.
Decisions Reached at Last Meeting (as of November 10, 2021)
The Board discussed comment letter feedback and completed its redeliberations on the proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. The Board made the following decisions:
The Board decided to expand the scope of assets eligible for portfolio layer method hedging to include all financial assets.
Attributes of Assets in the Closed Portfolio
The Board decided to remove the requirement that all assets in the closed portfolio have a contractual maturity date on or after the earliest-ending hedge period.
Fair Value Hedge Basis Adjustments
The Board affirmed the following decisions included in the proposed Update related to fair value hedge basis adjustments to:
- Require that an entity maintain fair value hedge basis adjustments at the closed portfolio level for a currently designated hedge
- Prohibit an entity from considering portfolio layer method fair value hedge basis adjustments on a currently designated hedge in its determination of credit losses.
The Board decided to align the anticipated and actual breach guidance in the following respects to:
- Allow partial dedesignation
- Require that an entity follow a rational approach to determine which layer or layers to dedesignate in a multiple-layer hedge.
- Present the fair value hedge basis adjustment associated with a breach in interest income
- Disclose the following for each actual breach:
- The amount of the fair value hedge basis adjustment recognized in interest income because of the breach
- The circumstance(s) that led to the breach.
The Board affirmed the following decisions included in the proposed Update to require:
- The disclosure of portfolio layer method fair value hedge basis adjustments related to currently designated hedges as reconciling items in disclosures outside hedge accounting
- The same hedge accounting disclosures for multiple-layer hedges that are required for current single-layer hedges in paragraph 815-10-50-4EEE.
Related to transition, the Board decided that an entity would:
- Record the effect of applying the fair value hedge basis adjustment amendments as a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption
- Apply multiple-layer portfolio layer method hedge guidance prospectively
- Be allowed to apply the amendments related to disclosures on either a full retrospective or prospective basis
- Disclose the nature of and reason for the change in accounting principle in transition and the cumulative effect of the change on the opening balance of each affected component of equity or net assets as of the date of adoption
- Be allowed to reclassify debt securities from held-to-maturity to available-for-sale upon adoption of a final Update only if the entity intends to apply portfolio layer method hedging to a closed portfolio that includes those debt securities. The decision of which securities to reclassify must be made within 30 days after the date of adoption, and the securities must be included in a closed portfolio that is designated in a portfolio layer method hedge within that 30-day period.
- Public business entities would be required to adopt the amendments in a final Update for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. All other entities would be required to adopt the amendments for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.
- Early adoption would be permitted on any date on or after issuance of a final Update for an entity that has adopted Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, for the corresponding fiscal and interim period (if applicable).
The Board decided that it has received sufficient information and analysis to make an informed decision on the expected costs of the amendments and that the expected benefits of the amendments justify the expected costs.
The Board directed the staff to draft an Accounting Standards Update for vote by written ballot.
Tentative Board Decisions Reached to Date (as of November 10, 2021)
A summary of the Board’s tentative decisions reached to date can be found here.
The following are links to the minutes for each meeting. To view Board meetings and handouts from the past 90 days, click here.
|November 10, 2021*||Board Meeting—The Board discussed comment letter feedback and completed its redeliberations on the proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method|
|March 31, 2021||Board Meeting—The Board discussed external review comments on a draft of a proposed Accounting Standards Update, sweep issues, and whether to issue a proposed Update. The Board changed the title of the project from “Hedging—Last-of-Layer Method” to “Fair Value Hedging—Portfolio Layer Method.”|
|January 22, 2020||Board Meeting—The Board continued initial deliberations, discussing disclosures and transition for the proposed amendments.|
|October 16, 2019||Board Meeting—The Board discussed in a decision-making meeting the last-of layer hedging topics that were originally discussed at its August 21, 2019 non-decision-making meeting.|
|August 21, 2019||Board Meeting—The Board discussed the issues encountered in developing a last-of-layer model for multiple layers and the accounting for fair value hedge basis adjustments in a non-decision-making meeting.|
|March 28, 2018||Board Meeting—The Board added the Last-of-Layer project to its technical agenda.|
Postgraduate Technical Assistant
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.