Accounting

New FASB ASU on Derivatives and Hedging

10 min read
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ASU No. 2017-12, Derivatives and Hedging (Topic 815) provides targeted improvements to accounting for hedging activities, rather than a complete overall.  The goal was to ease burdensome accounting rules for financial statement preparers and make the presentation of hedge accounting information easier to understand for financial statement users.

The following are some of the more significant changes:

  1. Permits hedge accounting for nonfinancial and financial risk components, and amends measurement methodologies to allow more flexibility in hedging interest rate risk for fixed and variable rate financial instruments. For example, adding the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as an eligible benchmark interest rate.
  2. Decreases complexity by eliminating the separate measurement and reporting of hedge ineffectiveness. For example, for cash flow and net investment hedges, all changes in the value of the hedging instrument will be deferred in other comprehensive income and recognized in earnings at the same time the hedged item affects earnings.
  3. Reduces cost by simplifying assessments of hedge effectiveness. For example, it allows subsequent assessments of hedge effectiveness qualitatively, if certain conditions are met. It also permits more time to perform the initial quantitative hedge effectiveness assessment. Certain private companies may align the timing of performance and documentation of initial and subsequent effectiveness testing with the timing of the issuance of interim or annual financial statements.
  4. Enhances disclosures and changes the presentation of hedge results to align with effects of the hedge.

The standard is effective for public business entities for fiscal beginning years after December 15, 2018, and interim periods within.  For all other entities, the standard is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.  Early adoption is permitted.

ABOUT THE AUTHOR

Jennifer Louis has over 25 years of experience in designing and instructing high-quality training programs in a wide variety of technical and “soft-skills” topics needed for professional and organization success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses her energy on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in Audit for Deloitte & Touche LLP. Jennifer graduated summa cum laude from Marymount University with a B.B.A. in Accounting.