EITF Issue No. 15-D: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
Last updated on March 24, 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 *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Project Objective and BackgroundAs it relates to derivative contracts, the term “novation” refers to replacing one of the parties to a derivative instrument with a new party. In practice, derivative instrument novations may occur for a variety of reasons, including (but not limited to) financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or in response to laws or regulatory requirements. The derivative instrument that is the subject of a novation may be the hedging instrument in a hedging relationship that has been designated under Topic 815, Derivatives and Hedging.
The issue is whether a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815, in and of itself, results in a requirement to designate that hedging relationship and therefore discontinue the application of hedge accounting.
The guidance in Topic 815 is not explicitly clear about the effect on an existing hedging relationship, if any, of a change in the counterparty to a derivative instrument that is designated as a hedging instrument. Furthermore, the existing guidance, which is limited, is interpreted and applied inconsistently in practice.
*Due Process DocumentsOn August 6, 2015, the Board issued proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The comment deadline was October 5, 2015.
- Read comment letters on the Exposure Draft
- Download the Accounting Standards Update
Decisions Reached at Last Meeting (December 11, 2015)The Board ratified the consensus reached at the November 12, 2015 EITF Meeting. The Board directed the staff to draft an Accounting Standards Update finalizing the consensus for vote by written ballot.
The EITF reached a consensus that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedge accounting relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met.
Specifically, when applying the guidance in paragraphs 815-25-40-1 (for fair value hedges) and 815-30-40-1 (for cash flow hedges), a change in the counterparty to a derivative instrument would not, in and of itself, be considered a “termination” of the original derivative instrument by the entity. Similarly, when applying the guidance in paragraph 815-20-55-56, a change in the counterparty to a derivative instrument would not, in and of itself, be considered a change in a “critical term” of the hedging relationship.
EITF/Board Meeting DatesThe EITF and Board meeting minutes are provided for the information and convenience of constituents who want to follow the EITF’s and the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future EITF or Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
|December 11, 2015
|EITF Ratification Minutes
|November 12, 2015
|EITF Meeting Minutes
|July 9, 2015
|EITF Ratification Minutes|
|June 18, 2015
|EITF Meeting Minutes
|May 14, 2015
EITF Education Session
|EITF Education Session Slides EITF Issue 15-D|
|March 18, 2015
|Agenda Prioritization Minutes|
Contact InformationMark Pollock
Postgraduate Technical Assistant