On the Horizon
Accounting for Financial Instruments—Hedge Accounting
The proposed ASU is intended to make targeted improvements to hedge accounting in order to better align it with companies’ risk management activities.In September, the FASB plans to issue its proposal to improve the hedge accounting model for financial instruments and nonfinancial items. The proposed Accounting Standards Update (ASU) is intended to make targeted improvements to hedge accounting in order to better align it with companies’ risk management activities.
The Board expects that the improvements in the Exposure Draft will reduce the costs and complexity of current hedging requirements incurred by preparers, as well as help financial statement users better understand the cost of an organization’s hedging programs and hedge results.
The proposed improvements will include:
- Permitting hedge accounting for contractually specified risk components in hedging relationships involving nonfinancial items
- Refining the accounting for hedged items in fair value hedges of interest rate risk
- Expanding the types of interest rates that can be hedged in hedges of interest rate risk
- Elimination of the separate recording of hedge ineffectiveness
- Presentation of the earnings effect of hedging instruments in the same income statement line item as the earnings effect of the hedged item
- New and enhanced disclosures
- Additional time to prepare quantitative hedge documentation, and
- Qualitative effectiveness testing after an initial quantitative test.
More information about this Exposure Draft, including how to provide feedback, can be found on the project page.
Insurance—Targeted Improvements to the Accounting for Long-Duration Contracts
The proposed ASU aims to provide financial statement users with more useful information about the amount, timing, and uncertainty of cash flows.In late September, the FASB plans to issue a proposed ASU on long-duration contracts issued by insurance organizations, such as life insurance and annuities. The proposed ASU is intended to improve existing recognition, measurement, and disclosure requirements.
The proposed ASU aims to provide financial statement users with more useful information about the amount, timing, and uncertainty of cash flows by:
- Requiring a current, updated measure of insurance reserves
- Improving the measurement of, and uniformity in, the accounting for benefits that provide protection from capital market downturns
- Simplifying the expensing of deferred acquisition costs, and
- Enhancing disclosures.
Proposed Chapter of Concepts Statement 8
In the coming months, the FASB will issue a proposed chapter of Concepts Statement 8—Conceptual Framework for Financial Reporting. The Conceptual Framework is a body of interrelated objectives and fundamentals of financial reporting that guide the Board’s standard-setting decisions.
The Exposure Draft will describe concepts for presentation of recognized items in the financial statements.The Exposure Draft will describe concepts for presentation of recognized items in the financial statements. The proposed presentation chapter will be available for comment for 90 days.
The FASB also is in the process of developing chapters describing concepts for measurement and disclosures. The Board plans to issue a proposal of a measurement chapter in the first half of 2017. A final chapter addressing disclosures is expected to be completed in the second half of 2017.
After completing the measurement and presentation chapters, the FASB intends to review the elements of financial statements (assets, liabilities, revenue, expenses, gains and losses). The Board will consider changes to the existing definitions that will enhance their usefulness and consistency in resolving issues.
More information can be found on the two project pages: Presentation and Measurement.