FASB proposes changes to the hedge accounting standard

The Financial Accounting Standards Board published a proposal to update accounting standards Wednesday to better align a company’s hedge accounting with its risk management strategies.

The proposals are based on coverage standard that the FASB published in 2017, which aimed to better align the economic results of risk management activities with hedge accounting. The new standard increases transparency on how the results of hedging activities are presented, both in financial statements and in footnotes, for investors and analysts when hedge accounting is applied.

The FASB has made targeted improvements to its accounting standards since last year, instead of introducing new standards as accountants try to digest the major changes of recent years from new revenue recognition rules, rental, long term insurance, credit loss, appraisal and classification. of financial instruments and hedge accounting.

“Generally speaking, to change accounting standards, I think we first need to make a clear advocacy for change,” FASB Chairman Richard Jones said at the annual financial reporting conference. Baruch College Wednesday. “In my opinion, in my own words, there are three reasons for the change. Above all, it is about providing users with better and more useful information that will directly influence their decisions on capital allocation. Second, to eliminate unnecessary costs and complexity from the system. Third, maintain and improve this 11,000-page codification. But before we can make a change successful, we need to clearly communicate the reason for the change. We also need to understand who would benefit from this change and how those users would use that information. “

FASB President Richard Jones (bottom) discusses accounting with Baruch College professor Norman Strauss (top left) and Acting SEC Chief Accountant Paul Munter (top right) at the conference annual report on Baruch College Financial Reporting.

One of the main provisions of the 2017 coverage standard was the addition of a “last of layer” coverage method. For a closed portfolio of prepayable financial assets at a fixed rate or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the latter method layer allows a company to hedge its exposure to changes in fair 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 on the timing and amount of cash flow.

Since the FASB released the hedging standard in 2017, voters told the board that the ability to choose single-layer hedge accounting is useful, but hedge accounting may better reflect management activities. risks if it is broadened to allow several layers of the same closed portfolio to be hedged according to the method.

The proposed update to the standards would extend the current single-layer model to allow multi-layered hedges of a single closed portfolio of prepayable financial assets or of one or more beneficial interests secured by a portfolio of instruments. loans repayable by anticipation according to the method. To reflect this expansion, the last layer method would therefore be renamed “portfolio layer method”.

In addition, the proposed update would clarify the eligible hedging instruments in a single tier strategy. It would also provide more guidance on the recognition and disclosure of fair value hedge base adjustments that would apply to both the current single-layer model and the proposed multi-layer model. In addition, the updated standards would indicate how basic fair value hedge adjustments should be taken into account when determining credit losses for assets included in the closed portfolio.

The proposed update would apply to all entities that choose to apply the portfolio layer method (currently referred to as the last layer method) of hedge accounting.

The ASU proposed is available on www.fasb.org. The FASB is asking its stakeholders to review the document and provide comments by July 5.

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