Accounting for Financial Instruments—Hedge Accounting
Last updated on February 3, 2017. 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
*Decisions Reached at the Last Meeting
*Tentative Board Decisions Reached to Date
*Board/Other Public Meeting Dates—Current
Project Objective and BackgroundThis 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 DocumentsOn September 8, 2016, the FASB issued proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The comment letter period ended on November 22, 2016.
- Download the September 8, 2016 proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
- Read the FASB in Focus which summarizes the proposed Accounting Standards Update.
- Read the press release on the proposed Accounting Standards Update.
- Use the electronic feedback form to submit comments on the proposed Accounting Standards Update.
- Read comment letters on the proposed Accounting Standards Update.
- Read a feedback summary on the proposed Accounting Standards Update.
- Download the Invitation to Comment on Hedge Accounting.
- Read the FASB news release introducing the Invitation to Comment on hedge accounting.
- Read comment letters on the Invitation to Comment on hedge accounting.
- Read a comment letter summary on the Invitation to Comment on hedge accounting.
- Download the Proposed Accounting for Financial Instruments Update.
- Read the news release introducing the proposed Accounting Standards Update.
- Read the FASB in Focus, which summarizes the proposed Accounting Standards Update.
- Listen to a podcast in which former FASB Chairman Robert Herz discusses the proposed Accounting Standards Update.
- Read the Frequently Asked Questions document which clarifies the proposed guidance by answering common questions received through outreach efforts.
- Read comment letters on the proposed Accounting Standards Update.
- Read the feedback summary on the proposed Accounting Standards Update.
- Read the Summary of Feedback Received through Meetings and Teleconferences with Users of Financial Statements on the proposed Accounting Standards Update.
- Accounting for Hedging Activities Exposure Draft
- Accounting for Hedging Activities Comment Letters
- Accounting for Hedging Activities Comment Letter Summary
Staff and Board members have conducted various outreach activities with a variety of stakeholders during the comment period of the Exposure Draft of the proposed Accounting Standards Update.
On October 17, 2016, the FASB hosted an educational webinar, IN FOCUS: FASB’s Proposed Accounting Standards Update on Hedging, which provided the history of the hedging project and why it was added to the FASB’s technical agenda, the proposed changes to the hedge accounting guidance and presentation and disclosure guidance in the proposed Update, and the transition guidance for the proposed Update. An archived version of the webinar is available on-demand. Please note: Registration (or the email address used to previously register) is required to view the archived webinar; CPE is not available for the archived webinar.
On December 2, 2016, the FASB hosted two public roundtables in Norwalk, CT, which provided an opportunity for those who had submitted comment letters to provide their feedback on the proposed Update.
*Decisions Reached at the Last Meeting (January 25, 2017)The Board discussed the following:
Affirmation of Amendments in the Proposed Update
An entity would be permitted to designate the hedged risk as the variability in cash flows attributable to changes in a contractually specified component in a cash flow hedge of a forecasted purchase or sale of a nonfinancial asset.
An entity would be required to present all effects of a hedging instrument included in the assessment of effectiveness in the same income statement line item as the earnings effect of the hedged item for all hedging relationships. For fair value and cash flow hedges, an entity would be required to present amounts excluded from the assessment of effectiveness in the same income statement line item in which the earnings effect of the hedged item is or will be presented.
For fair value hedges of interest rate risk, an entity may measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
For fair value hedges of interest rate risk and prepayable financial instruments, an entity may consider only how changes in the benchmark interest rate affect a decision to settle a debt instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk.
For fair value hedges of interest rate risk, an entity is permitted to measure the change in the fair value of the hedged item either on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception or on the full contractual coupon cash flows as required by current GAAP. (The Board plans to redeliberate one aspect of this proposed amendment, the “market yield test.” See “Issues for Redeliberation” below.)
The concept and definition of the term benchmark interest rate and a list of eligible benchmark rates in the United States would be retained.
The Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate would be added to the list of eligible benchmark interest rates in the United States.
For cash flow hedges of interest rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest rate.
A public business entity would be given more time to perform the initial prospective quantitative assessment of hedge effectiveness. A public business entity could perform that assessment at any time after hedge designation, but would be required to perform that assessment no later than the quarterly effectiveness testing date, using data applicable as of the date of hedge inception.
For purposes of assessing whether the qualifying criteria for the critical terms match method are met for a group of forecasted transactions, an entity may assume that the hedging derivative matures at the same time as the forecasted transactions if both the derivative maturity and the forecasted transactions occur within the same 31-day period.
If an entity that applies the shortcut method determines that use of that method was not or no longer is appropriate, the entity would be permitted to apply a long-haul method for assessing hedge effectiveness as long as the hedge is highly effective and the entity documents at hedge inception which long-haul method it would use.
An entity would be required to disclose information regarding cumulative basis adjustments for fair value hedges and provide the revised tabular disclosure for fair value and cash flow hedges.
In instances in which an initial quantitative effectiveness assessment is required, an entity would be allowed to perform subsequent qualitative assessments of hedge effectiveness.
Amendments in the Proposed Update That the Board Rescinded and Decided Not to Redeliberate
The Board rescinded the proposed amendment that would have required an entity to present the change in the fair value of a hedging instrument for a hedged forecasted transaction that is probable of not occurring in the income statement line item in which the hedged forecasted transaction would have been presented had it occurred. This decision would retain current GAAP and not prescribe presentation guidance for missed forecasts.
The Board rescinded the proposed disclosure that would have required qualitative disclosures of quantitative hedge accounting goals.
Issues for Redeliberation
The Board will consider whether to retain or eliminate the proposed market yield test. This test would require the use of total coupon cash flows in calculating the change in the fair value of the hedged item attributable to interest rate risk in instances in which the benchmark rate is greater than the market yield of the hedged item at hedge inception.
The Board will consider whether to retain or amend the recognition model for amounts excluded from the assessment of hedge effectiveness.
The Board will consider whether to retain or eliminate the proposed prohibition on returning to qualitative testing. Under the proposed amendments, an entity would be prohibited from returning to performing qualitative assessments of hedge effectiveness in a period after it begins performing quantitative hedge effectiveness assessment because of a change in facts and circumstances.
The Board will consider alternatives that would amend the timing of the preparation of hedge documentation for private companies.
The Board will decide whether a cross-currency basis spread in a cross-currency swap may be considered to be an amount that may be excluded from the assessment of hedge effectiveness.
Issue for Potential Redeliberation
The Board decided that the staff should perform further research to determine whether to include in redeliberations potential amendments to the fair value portfolio hedging model of interest rate risk related to prepayable assets.
Board Decisions Related to Other Feedback Received
The Board decided not to add the concept that a rate can be “expected to become widely used” to the current definition of the term benchmark interest rate. Therefore, the Board would not further amend the definition of a benchmark interest rate beyond the amendments already made in the proposed Update.
The Board decided not to deliberate the issue raised in DIG H17, Hedging Functional-Currency-Equivalent Proceeds to Be Received from a Forecasted Foreign-Currency-Denominated Debt Issuance.
The Board decided that in a cash flow hedge of a hedged forecasted transaction if the hedged risk component changes from the risk originally designated (for example, from LIBOR to Prime) and the hedged forecasted transaction remains probable of occurring, an entity would not need to dedesignate the hedging relationship if the derivative remains highly effective at offsetting the cash flows associated with the hedged item. A change in the hedged risk also would not affect an entity’s conclusion of whether the forecasted transaction remains probable of occurring. This decision would apply to hedges of both financial instruments and nonfinancial items.
*Tentative Board Decisions Reached to Date (As of January 25, 2017)Tentative Board Decisions to Date During Deliberations.
*Next StepsThe Board will redeliberate at future meetings the issues that it agreed to reconsider at the January 25, 2017 Board meeting.
*Board/Other Public Meeting Dates—CurrentThe 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.
|*January 25, 2017||Board Meeting—Discussion about the feedback received on September 8, 2016 proposed Accounting Standards Update, and discuss items for affirmation and potential items for redeliberation based on the feedback received on the proposed Update.|
|July 13, 2016||Board Meeting—Decisions regarding sweep issues, cost and benefits, and permission to ballot.|
|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.|
*Contact InformationJeffrey Gabello
Supervising Project Manager
Assistant Project Manager
Postgraduate Technical Assistant
Postgraduate Technical Assistant