Project Update

Accounting for Financial Instruments—Hedge Accounting

Last updated on July 20, 2015. 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 (June 29, 2015)

The Board continued deliberations on targeted improvements to be made to the hedge accounting model in FASB Accounting Standards Codification® Topic 815, 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.

Effectiveness Threshold

The Board decided to retain the highly effective threshold of Topic 815, Derivatives and Hedging, for all hedging relationships where a quantitative assessment methodology is used.

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) (May 2010 ED) 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.

Disclosures

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.

Shortcut Method

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.

*Tentative Board Decisions Reached to Date (As of June 29, 2015)

Tentative Board Decisions to Date During Deliberations.

*Next Steps

The staff will develop a draft proposed Accounting Standards Update based on the tentative decisions reached by the Board. Later in the drafting process, the Board will discuss any additional issues that arise during drafting, the benefits and cost of the proposed Accounting Standards Update, transition, 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.

*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

Nick Milone
Practice Fellow
nkmilone@fasb.org

Julie Um
Assistant Project Manager
jcum@fasb.org

Rosemarie Sangiuolo
Project Consultant
rsangiuolo@fasb.org

Jeffrey Bjorkman
Postgraduate Technical Assistant
jpbjorkman@fasb.org

Dominick Viramontes
Postgraduate Technical Assistant
drviramontes@fasb.org