The accounting standards keeper issues the final pillar in its plans to update accounting for financial instruments

The Financial Accounting Standards Board has issued a new proposal that it says would make "targeted improvements" to the accounting guidance for hedging activities.

Among the changes the update would impose, if adopted, are expanding the use of component hedging for both non-financial and financial risks and refining the measurement techniques for hedged items in fair-value hedges of benchmark interest rate risk.

The proposal is part of a three-pronged approach to update accounting rules for financial instruments. FASB has already completed standards updates on recognizing and measuring financial instruments and on how to recognize credit losses in financial statements.

"Stakeholders shared concerns that current hedge accounting requirements do not faithfully portray the economic results of an institution's risk management activities," said FASB Chairman Russell G. Golden. "The proposed ASU sets forth the Board's recommendations for improving this area of financial reporting, and for simplifying the application of hedge accounting guidance without compromising the quality of financial reporting information provided to investors."

What it Would Change

In addition to the changes mentioned above, the exposure draft contains proposals for improving how the economic results of an institution's risk management activities are portrayed by:

  • Eliminating the separate measurement and reporting of hedge ineffectiveness

  • Requiring for cash flow and net investment hedges that all changes in fair value of the hedging instrument included in the hedging relationship be deferred in other comprehensive income and released to the income statement in the period(s) when the hedged item affects earnings

  • Requiring that changes in the fair value of hedging instruments be recorded in the same income statement line item as the earnings effect of the hedged item

  • Requiring enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items.

Additionally, the exposure draft contains proposals to simplify the application of hedge accounting by:

  • Providing more time for the completion of initial quantitative assessments of hedge effectiveness

  • Allowing subsequent assessments of hedge effectiveness to be performed on a qualitative basis when an initial quantitative test is required

  • Clarifying the application of the critical terms match method for a group of forecasted transactions

  • Allowing an institution that elects the shortcut method to continue hedge accounting by using a "long-haul" method to assess hedge effectiveness if use of the shortcut method was not or no longer is appropriate after hedge inception.

FASB has also scheduled two public roundtable meetings in December to discuss the proposal and is accepting comments on the plans until Nov. 22.