Project Update

Accounting for Financial Instruments—Hedge Accounting

Last updated on July 26, 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
*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.

*Decisions Reached at the Last Meeting (July 13, 2016)

The Board discussed the following:
  1. Clarification of the “time” requirement when using the “critical terms match” (CTM) method to assess effectiveness for a group of forecasted transactions
  2. Partial-term fair value hedges under the shortcut method
  3. Retrospective transition method
  4. Presentation of the reclassification of hedging amounts in accumulated other comprehensive income (AOCI) in situations involving a missed forecast
  5. Analysis of the costs and benefits of the Board’s decisions
  6. Permission to ballot a Proposed Accounting Standards Update and comment period
Clarification of the “Time” Requirement when Using the “Critical Terms Match” (CTM) Method to Assess Effectiveness for a group of forecasted transactions

The Board decided that it would allow an entity to use the CTM method for a cash flow hedge of a group of forecasted transactions if the forecasted transactions occur and the derivative matures within the same 31-day period and the entity meets all other requirements for the CTM method.

Partial-Term Fair Value Hedges under the Shortcut Method

The Board decided that it would amend one criterion of the shortcut method related to the matching of the expiration date of the interest rate swap and the maturity date of the hedged item. That amendment would allow partial-term fair value hedges of interest rate risk under the shortcut method.

Retrospective Transition Method

The Board decided that it would not allow the retrospective method of transition. Therefore, only a modified retrospective approach would be permitted.

Presentation of the reclassification of hedging amounts in accumulated other comprehensive income (AOCI) in situations involving a missed forecast

The Board decided to require that if a hedged forecasted transaction is probable of not occurring, amounts reclassified from AOCI to earnings be presented in the same income statement line item in which the hedged forecasted transaction would have been presented had the forecasted transaction occurred. The Board will include a question in the forthcoming proposed Accounting Standards Update on this decision.

Analysis of the Costs and Benefits of the Board’s Decisions

The Board concluded that it has received sufficient information and analysis on the forthcoming proposed amendments on hedging to make an informed decision on the issues presented and that the expected benefits of the amendments justify the perceived costs.

Permission to Ballot a Proposed Update and Comment Period

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.

The Board decided to provide a 75-day comment period for the forthcoming proposed Update.

*Tentative Board Decisions Reached to Date (As of July 13, 2016)

Tentative Board Decisions to Date During Deliberations.

*Next Steps

The staff will continue drafting a proposed Accounting Standards Update based on the tentative decisions reached by the Board.

*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.

*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.
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

Adam Kamhi
Valuation Fellow

Julie Um
Assistant Project Manager

Rosemarie Sangiuolo
Project Consultant

Josh Seward
Postgraduate Technical Assistant

Caro Baumann
Postgraduate Technical Assistant