Accounting for Financial Instruments: Hedging



On August 28, 2017, the FASB completed its Accounting for Financial Instruments: Hedging project by issuing Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this Update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP

To that end, the new guidance:
  1. Eliminates the separate measurement and reporting of hedge ineffectiveness.
  2. Allows more risk components to qualify for hedge accounting such as the variability in cash flows attributable to change in a contractually specified component of a forecasted purchase or sale of a nonfinancial asset or the contractually specified interest rate of a variable-rate financial instrument.
  3. Adds the Securities Industry and Financial Markets Association (SIFMA) swap rate to the list of permissible benchmark interest rates in the United States.
  4. Amends measurement methods for calculating the change in fair value of the hedged item in fair value hedges of interest rate risk.
  5. Introduces the “last-of-layer” method for hedges of portfolios of prepayable financial assets.
  6. Permits an entity to exclude from the assessment of effectiveness the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread.
  7. Permits an entity to recognize in earnings the initial value of amounts excluded from the assessment of effectiveness using a systematic and rational method over the life of the hedging instrument.
  8. Aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s risk management activities. An entity is now required to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.
  9. Amends existing income statement disclosures to focus on the effects of hedge accounting on individual income statement line items.
  10. Adds new balance sheet disclosures regarding fair value hedge basis adjustments.
  11. Allows an entity to perform subsequent assessments of hedge effectiveness qualitatively for instances in which initial quantitative testing is required.
  12. For all entities, extends the date by which the initial prospective quantitative assessment of hedge effectiveness must be performed to the first quarterly effectiveness date using the data applicable as of hedge inception.
  13. Allows private companies that are not financial institutions and certain not-for-profit entities until the time that the next interim (if applicable) or annual financial statements are available to be issued to perform the initial quantitative and all quarterly effectiveness tests and designate the method of assessing hedge effectiveness.
  14. Allows an entity to assume that the hedging derivative matures at the same time as the forecasted transactions if both the derivative maturity and the forecasted transactions occur within the same 31-day period or fiscal month for purposes of evaluating the qualifying criteria for the critical terms match method.
  15. Allows an entity to document a long-haul method of assessing effectiveness at hedge inception that the entity may use if it determines that using the shortcut method was not or no longer is appropriate.

Effective Dates

For public business entities¸ the new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods beginning after December 15, 2021.

For more information on effective dates, please see Accounting Standards Update No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates.

Early application is permitted in any interim period after issuance of the Update. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

Post-Issuance Activities

Board Meetings  Codification Improvements Issued Ongoing Projects

Additional Information

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