FASB extends hedge accounting standard to allow multiple layers

The Financial Accounting Standards Board has issued a update of accounting standards Monday aimed to better align hedge accounting with an organization’s risk management strategies.

The update builds on the hedging standard issued by the FASB in 2017, which also attempted to better align the economic results of risk management activities with hedge accounting. This standard has enhanced transparency on how the results of hedging activities are presented in the financial statements as well as in the footnotes, for investors and analysts when hedge accounting is applied.

One of the key provisions of the hedging standard was the addition of the last tier hedging method. For a closed portfolio of fixed-rate callable financial assets or one or more beneficial interests secured by a portfolio of callable financial instruments, including mortgages or mortgage-backed securities, the last tier method allows an entity to hedge its exposure to changes in value due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults and other events affecting timing and amount cash flow.

However, since this standard was issued five years ago, various stakeholders have told the FASB that the ability to choose hedge accounting for a single level is useful, but that hedge accounting may better reflect management activities. risks if it were extended to allow several levels of the same closed level. portfolio to be hedged according to the method. Therefore, the new update expands the current single layer method to allow for multiple covered layers of a single closed wallet under the method. To reflect this expansion, the last layer method has now been renamed the wallet layer method.

“The extended hedge accounting method better reflects the effects of risk management activities in the financial statements and ultimately provides investors and other allocators of capital with more transparent and decision-useful information about the use of derivatives by an entity,” FASB Chairman Richard Jones said in a statement. statement.

Additionally, the update expands the scope of the portfolio layer method to include non-callable assets and specifies eligible hedging instruments in a single layer hedge. It also provides additional guidance on accounting for and disclosing hedge basis adjustments under the portfolio layer method, as well as how hedge basis adjustments should be taken into account when determining credit losses for the assets included in the closed portfolio.

The updated accounting standards will apply to all entities that choose to apply the hedge accounting method at the portfolio level. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. In addition, early adoption is allowed.

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