Tentative Board Decisions
Tentative Board decisions are provided for those interested in following the Board’s deliberations. All of the reported decisions are tentative and may be changed at future Board meetings.
[Revised—07/01/15] Accounting for Financial Instruments—Hedging. The Board continued deliberations on the accounting for hedging activities, specifically discussing the qualifying threshold, component hedging for nonfinancial items, benchmark interest rates, application issues related to fair value hedges of interest rate risk, the shortcut method, and presentation and disclosure.
The Board decided to retain the highly effective threshold of Topic 815, Derivatives and Hedging, for all hedging relationships.
Presentation and Timing of Recording the Change in the Fair Value of a Hedging Derivative in Fair Value and Cash Flow Hedges
The Board decided that the change in the fair value of the hedging derivative would no longer be split between effective and ineffective portions. For fair value hedges, if the hedging relationship meets the highly effective threshold, the entire change in the fair value of the derivative would be recorded in the same income statement line as the hedged item (for example, interest expense). For cash flow hedges, if the hedging relationship meets the highly effective threshold, the entire change in the fair value of the derivative would be recorded in other comprehensive income and reclassified to the same income statement line as the hedged item when the hedged item affects earnings.
This decision would render the “overhedge” and “underhedge” accounting for cash flow hedges in current GAAP and the May 2010 Proposed Accounting Standards Update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815), as obsolete.
Component Hedging of Nonfinancial Items
For hedges of nonfinancial items, the Board decided that the hedged item may be a contractually specified component or ingredient linked to an index or rate stated in the contract.
Quantitative versus Qualitative Hedge Effectiveness Testing
The Board decided to require initial quantitative testing of all hedges unless they meet the requirements for the shortcut or critical terms match methods. An entity would be required to perform subsequent quantitative effectiveness testing only if facts and circumstances change.
The Board decided to amend hedge accounting disclosures as follows: (1) require additional disclosures related to cumulative basis adjustments for fair value hedges, (2) amend certain tabular disclosures in current GAAP to focus on the impact of hedge accounting on income statement line items, and (3) require enhanced qualitative disclosures to describe quantitative goals, if any, set to achieve hedge accounting objectives.
Hedge Documentation Requirements
The Board decided that an entity may perform the quantitative testing portion of hedge documentation requirements before or at the three-month effectiveness testing period. The timing of the preparation of all other hedge documentation would not change.
No Voluntary De-designation of Hedges Proposed in the May 2010 Exposure Draft
The Board decided to retain the guidance in Topic 815 to allow the voluntary de-designation of a hedging relationship.
Benchmark Interest Rates
For hedges of variable-rate financial instruments, the Board decided that an entity may designate the contractually specified index rate in cash flow hedges of interest rate risk, thus eliminating the concept of benchmark interest rates for variable-rate financial instruments. For hedges of fixed-rate financial instruments, the Board decided to retain the existing definition of benchmark interest rates and also add the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA) to the list of acceptable rates.
Total Coupon—Fair Value Hedges
The Board decided that when measuring the change in fair value of the hedged item in a fair value hedge of interest rate risk, an entity may designate the benchmark component of the total coupon cash flows attributable to the benchmark interest rate as the hedged risk.
Callable Debt—Fair Value Hedges
The Board decided that an entity may consider the effect of a prepayment option only as it relates to the risk designated as being hedged (for example, interest rate risk).
Partial Term—Fair Value Hedges
The Board decided that an entity may designate a portion of the term of a financial instrument as the hedged risk. That is, an entity is permitted to calculate the change in fair value of the hedged item assuming the same term as the derivative designated as the hedging instrument.
The Board decided that an entity may apply a long-haul method if for some reason use of the shortcut method was or is no longer appropriate (as long as the hedge is highly effective from inception of the hedging relationship). The entity would be required to document at the inception of the hedging relationship which long-haul methodology would be used.
Based on the tentative decisions, the staff plans to:
- Develop a staff draft of a proposed Accounting Standards Update to amend Topic 815 reflecting the Board’s tentative decisions
- Identify any “sweep” issues to bring back to the Board
- Prepare an analysis of the costs, benefits, and complexity of the proposed Update, including any additional consideration of the effect the tentative decisions may have on entities that are other than public business entities
- Determine the transition approach
- Discuss the comment period with the Board.
Pensions and Other Postretirement Benefits: Presentation and Disclosure.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The Board decided to add a project to its technical agenda to improve the presentation of net benefit cost in an employer’s financial statements.
The Board decided to simplify and improve the reporting of net benefit cost for investors and preparers by requiring the following:
- If a plan is material, an entity would be required to present service cost in the same line item or items as other current employee compensation costs and present the remaining components of net benefit cost in a separate line item outside operating items, if applicable.
- Limit the components of net benefit cost eligible to be capitalized to service cost.
The Board directed the staff to draft an Exposure Draft of a proposed Accounting Standards Update for a vote by written ballot.
Disclosure Framework: Disclosure Review—Defined Benefit Plans. The Board discussed potential changes to the disclosure requirements for defined benefit plans in employers’ financial statements and made the following decisions:
- Add language related to the application of materiality to defined benefit plan disclosures and include an overall objective for the disclosures to promote the use of discretion by reporting entities.
- Add the following new disclosure requirements for all entities:
- The nature of the benefits provided, the employee groups covered, and a description of the type of plan formula
- The weighted-average interest crediting rate of cash balance pension plans
- The aggregate projected benefit obligation and aggregate fair value of plan assets for pension plans with benefit obligations in excess of plan assets
- Quantitative and qualitative disclosures from Topic 820 on fair value measurement about plan assets measured at net asset value using the practical expedient
- A narrative description of the reasons for significant gains and losses affecting the benefit obligation or plan assets
- Separate disclosures about U.S. plans and plans outside the United States.
- Remove the following disclosure requirements for all entities:
- The amount of the accumulated benefit obligation
- The aggregate pension accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets
- The amount and timing of plan assets expected to be returned to the entity
- Disclosures related to the June 2001 Japanese Welfare Pension Insurance Law
- Related party disclosures about the amount of future annual benefits covered by insurance and annuity contracts, and significant transactions between the employer or related parties and the plan
- The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
The Board will continue its discussion about potential changes to the disclosure requirements for defined benefit plans at an upcoming meeting.