Project Update

Accounting for Financial Instruments—Hedge Accounting

Last updated on May 12, 2016. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the IASB and the FASB (Boards). It was prepared by the staff and is for the information and convenience of their constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Project Objective and Background
Due Process Documents
IASB Due Process Documents
*Decisions Reached at the Last Meeting
*Tentative Board Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates—Current
Contact Information

Project Objective and Background

This project addresses issues related to hedge accounting for financial instruments and non-financial items. The objective of this project is to make targeted improvements to the hedge accounting model based on the feedback received from preparers, auditors, users and other stakeholders. The Board will consider opportunities to align with IFRS 9 Financial Instruments.

Click here for the project objective and background information on the overall Accounting for Financial Instruments project.

Due Process Documents

On February 9, 2011, the FASB issued a Discussion Paper—Invitation to Comment—Selected Issues about Hedge Accounting to solicit input on the IASB’s Exposure Draft, Hedge Accounting. The comment period ended on April 25, 2011.

On May 26, 2010, the FASB issued one comprehensive 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). The comment period ended on September 30, 2010.
On June 6, 2008, the FASB issued an Exposure Draft, Accounting for Hedging Activities. The comment period ended on August 15, 2008.

IASB Due Process Documents

In July 2014, the IASB published the final version of IFRS 9 Financial Instruments.

IFRS 9 Financial Instruments

Click here to access the IASB's hedge accounting project page for more information about the IASB’s deliberations.

*Decisions Reached at the Last Meeting (March 23, 2016)

The Board discussed transition alternatives and related disclosures, transition elections, and additional transition considerations at the adoption date.

Transition Alternatives

The Board decided that an entity would apply either a modified retrospective approach or a retrospective approach as of the adoption date to hedging relationships existing at that date.

If an entity elects to apply a modified retrospective approach for cash flow and net investment hedges, the entity would record the cumulative effect of the application of the recognition requirements in accumulated other comprehensive income with an offsetting adjustment through the opening balance of retained earnings as of the adoption date. An entity would continue to be required to provide the tabular disclosures resulting from the application of current guidance for comparative periods before the date of adoption. An entity would be required to provide the new tabular disclosures for the periods after the date of adoption.

If an entity elects to apply a retrospective approach for all hedges, the entity would be required to provide the new tabular disclosures for all periods presented.

Transition Disclosures

The Board decided that upon adoption, an entity would be required to provide the following transition disclosures within Topic 250 on accounting changes and error corrections:
  1. The nature of and reason for the change in accounting principle
  2. The cumulative effect of the change on the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the date of adoption
  3. The disclosure in (1) and (2) should be provided in each interim and the annual financial statement period in the year of the change.
The Board decided that if an entity elects to use a retrospective approach, the entity also would be required to provide the following additional transition disclosures within Topic 250:
  1. A description of the prior-period information that has been retrospectively adjusted
  2. The cumulative effect of the change on the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the earliest period presented.
Transition Elections at Adoption

The Board decided to allow an entity to make the following one-time elections upon adoption:
  1. An entity could amend hedge documentation for existing hedging relationships to incorporate whether subsequent assessments of effectiveness would be performed qualitatively. An entity could make this election by the end of the first fiscal year after the adoption date.
  2. An entity could amend hedge documentation for existing shortcut method hedging relationships to incorporate how quantitative assessments of effectiveness would be performed if it is determined at a later date that use of the shortcut method is no longer appropriate. An entity could make this election by the end of the first fiscal year after the adoption date.
  3. An entity could set the terms of the hypothetical derivative to be at-market (that is, a fair value of zero) as of the original hedge inception date (that is, before the adoption date) for hedging relationships that meet the criteria to designate the variability in a contractually specified component as the hedged risk. An entity could make this election on or before the first quarterly hedge effectiveness assessment date after the adoption date.
Additional Transition Considerations at Adoption

Measurement Methodology for Hedged Items in Fair Value Hedges of Interest Rate Risk

The Board decided that if an entity elects to de-designate and immediately re-designate a fair value hedge of interest rate risk upon adoption and change its measurement methodology for the hedged item in accordance with the adoption of the amendments, the basis adjustment of the hedged item from the de-designated hedging relationship would be incorporated into the new hedging relationship. That is, an entity would adjust the cumulative basis adjustment recorded for the hedged item in the de-designated hedging relationship to reflect the basis adjustment that would have been recorded if the revised measurement methodology in the re-designated relationship had been used throughout the hedging relationship’s life. Entities would adjust the basis of the hedged item through the opening balance of retained earnings upon adoption of the proposed amendments.

Incorporating Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index into the Definition of Benchmark Interest Rate for Fair Value Hedges

The Board considered the transition for hedges of a tax-exempt security where the hedged risk was the total price of the security before adoption. The Board decided that if upon adoption of the proposed amendments, an entity were hedging a tax-exempt security where the hedged risk was the total price of the security, and it de-designated and simultaneously re-designated the hedging relationship with the hedged risk defined as fluctuations in SIFMA, the basis adjustment from the de-designated hedging relationship at the time of de-designation would be manually amortized over the remaining life of the hedged item on a level-yield basis.

Partial-Term Fair Value Hedging

The Board decided that there would be no transition guidance for partial-term fair value hedges existing at adoption for which the hedge is designated in accordance with paragraph 815-20-25-12(b)(2)(ii). The Board plans to include a question in the proposed Update about whether entities apply the current partial-term hedging guidance and, if so, whether transition guidance for those hedging relationships is needed.

Disclosures

The Board decided that an entity would be exempt from providing the following disclosures for periods before the adoption date that are presented in the financial statements:
  1. The basis adjustment amounts for fair value hedges
  2. Qualitative information about quantitative goals.
Early Adoption

Early adoption would be permitted at the beginning of any fiscal period before the effective date. An entity would be required to adopt all of the amendments at one date.

*Tentative Board Decisions Reached to Date (As of March 23, 2016)

Tentative Board Decisions to Date During Deliberations.

*Next Steps

The staff will continue to develop a draft proposed Accounting Standards Update based on the tentative decisions reached by the Board. Later in the drafting process, the Board will discussthe benefits and cost of the proposed Accounting Standards Update and comment period.

*Board/Other Public Meeting Dates—Current

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*March 23, 2016 Board Meeting—Decisions regarding transition alternatives
December 21, 2015 Board Meeting—Decisions regarding additional hedge documentation relief for private companies.
October 7, 2015 Board Meeting—Decisions regarding net investment hedges, the treatment of excluded components for cash flow hedges and net investment hedges, the use of the total coupon cash flows in fair value hedges, sub-benchmark hedges, and contract features that limit exposure in cash flow hedges of nonfinancial items.
June 29, 2015 Board Meeting—Decisions regarding 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 disclosures.
June 10, 2015 Board Meeting—Discussions about hedges of benchmark interest rate risk and overall changes to the hedge accounting model.
May 27, 2015 Board Meeting—Discussions about the presentation of hedge ineffectiveness, disclosures related to cumulative-basis adjustments in fair value hedges, tabular disclosures about the effect of hedge accounting on statement of financial performance line items, and hedge documentation requirements.
April 22, 2015 Board Meeting—Discussions about selected benchmark interest rate hedging issues, shortcut and critical terms match methods, and the effectiveness threshold for hedges of financial assets and liabilities.
April 7, 2015 Board Meeting—Discussions about the presentation of hedge ineffectiveness, defining a reasonably effective threshold, fair value hedges of nonfinancial items, disclosures for hedges of nonfinancial items, and qualitative effectiveness testing.
February 25, 2015 Board Meeting—Discussions about the effectiveness threshold and qualitative versus quantitative testing of hedge effectiveness, as well as component hedging for nonfinancial items.
November 5, 2014 Board Meeting—Project added to the technical agenda
September 23, 2014 Board Meeting—Discussions about feedback received on the hedge accounting portion of the Board’s May 2010 proposed Accounting Standards Update. The Board also discussed their preferences regarding the approach in carrying out the hedge accounting project.
January 29, 2014 Board Meeting—Decision to perform research on the scope of the hedge accounting phase of the project
May 2, 2012 Education Session—Discussions about the major themes that emerged through outreach efforts with financial statement users regarding derivatives and hedge accounting.
November 30, 2011 Education Session—Discussions about the IASB’s hedge accounting model, presented by the IASB staff. Click here for the slides used in the IASB’s presentation.
August 24, 2011 Board Meeting—Discussions about the comments received on the Invitation to Comment, Selected Issues about Hedge Accounting
March 16, 2011 Joint Board Meeting—Discussions about the outreach and comment letter summaries on the IASB’s Exposure Draft.
Click here for minutes of public meetings on the accounting for financial instruments project that were held related to the issuance of the May 2010 proposed Update on financial instruments.

Contact Information

Jeffrey Gabello
Supervising Project Manager
jjgabello@fasb.org

Adam Kamhi
Valuation Fellow
akamhi@fasb.org

Julie Um
Assistant Project Manager
jcum@fasb.org

Rosemarie Sangiuolo
Project Consultant
rsangiuolo@fasb.org

Dominick Viramontes
Postgraduate Technical Assistant
drviramontes@fasb.org

Josh Seward
Postgraduate Technical Assistant
jdseward@fasb.org