Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method
On March 28, 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method.
The amendments in this Update expand the current last-of-layer method of hedge accounting that permits only one hedged layer to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method.
Additionally, amendments in this Update:
- Expand the scope of the portfolio layer method to include nonprepayable assets
- Specify eligible hedging instruments in a single-layer hedge
- Provide additional guidance on the accounting for and disclosure of hedge basis adjustments
- Specify how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.
Transition and Effective Dates
For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Upon adoption, any entity may designate multiple hedged layers of a single closed portfolio solely on a prospective basis. All entities are required to apply the amendments related to hedge basis adjustments under the portfolio layer method, except for those related to disclosures, on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date.
Early adoption is permitted on any date on or after the issuance of this Update for any entity that has adopted the amendments in Update 2017-12 for the corresponding period.
An entity may reclassify debt securities classified in the held-to-maturity category at the date of adoption to the available-for-sale category only if the entity applies portfolio layer method hedging to one or more closed portfolios that include 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 one or more closed portfolios that are designated in a portfolio layer method hedge within that 30-day period.
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