Last updated on October 18, 2019. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Sections updated on the date above are indicated with an asterisk *)
Project Objective and Background
Objective:The objective of this project is to address issues related to accounting for basis adjustments and multiple-layer hedging strategies within the last-of-layer method.
Background:One of the major changes to the hedge accounting guidance made in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815)—Targeted Improvements to Accounting for Hedging Activities, was the addition of the last-of-layer method. For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, the last-of-layer method allows an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. Under this designation, prepayment risk is not incorporated into the measurement of the hedged item.
Following the issuance of Update 2017-12, stakeholders raised issues around the implementation of the last-of-layer method. Specifically, they asked:
- How and when is an entity permitted or required to allocate the last-of-layer basis adjustment to the individual assets or sub-pools within the closed pool?
- Is it permissible for an entity to employ a multiple-layer hedging strategy to the closed portfolio?
Exposure Draft:There are no exposure documents at this time.
There are no media releases or educational materials at this time.
Media Releases and Educational Materials
Tentative Board Decisions Reached to Date (as of October 16, 2019)
October 16, 2019
At the October 16, 2019 Board meeting, the Board discussed the following topics that were originally introduced at its August 21, 2019 educational meeting on last-of-layer hedging.
In allowing an entity to designate multiple layers (that is, more than one hedging relationship associated with a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments), the Board decided that it would:
- Require an entity to dedesignate the entirety of one or more hedging relationships affected by an actual breach. An actual breach occurs when the sum of the hedged items associated with a closed portfolio is greater than the total assets in the closed portfolio in the current period.
- Continue to allow partial dedesignation for anticipated breaches. An anticipated breach occurs when the sum of the hedged items is not in breach in the current period but is expected to be in breach in a future period.
- Permit an entity to document at hedge inception a sequence in which hedging relationships associated with a closed portfolio would be dedesignated in the case of an actual breach. If an entity does not document a dedesignation sequence at hedge inception and an actual breach occurs, the entity would be required to dedesignate all hedging relationships associated with the closed portfolio.
- Require that all hedging relationships associated with the closed portfolio be supported by all the assets in the closed portfolio. That is, all the assets in the closed portfolio must have a contractual maturity date after the latest partial-term hedge matures, and all financial assets in the closed portfolio must be prepayable by the earliest hedging relationship’s maturity date.
Fair Value Hedge Basis Adjustment Issues
For the existing single-layer last-of-layer hedging model under current GAAP and the proposed multiple-layer model, the Board decided that it would:
- Prohibit an entity from allocating the fair value hedge basis adjustment to the assets in the closed portfolio during an outstanding last-of-layer hedge.
- Prohibit an entity from considering a last-of-layer fair value hedge basis adjustment on an outstanding hedge when determining an allowance under the current expected credit loss model.
- Require a last-of-layer fair value hedge basis adjustment to be presented as a reconciling item in disclosures required by other areas of GAAP.
- Require an entity to recognize and present the fair value hedge basis adjustment associated with an actual breach in the income statement based on how the assets that caused the breach were removed from the closed portfolio.
August 21, 2019 (Non-Decision-Making Meeting)At the August 21, 2019 Board meeting, the Board discussed outreach performed and issues encountered in (1) developing a last-of-layer model for multiple layers and (2) potentially providing further guidance on the accounting for fair value hedge basis adjustments for both the existing single-layer model and proposed multiple-layer model. The meeting was educational; no decisions were made.
The Board meeting minutes, handouts, and videos 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.
Board Meeting Materials and Information*
The following are links to the minutes for each meeting. To view Board meetings and handouts from the past 90 days, click here.
|October 16, 2019*||Board Meeting—The Board discussed in a decision-making meeting the last-of layer hedging topics that were originally discussed at its August 21, 2019 non-decision-making meeting.|
|August 21, 2019||Board Meeting—The Board discussed the issues encountered in developing a last-of-layer model for multiple layers and the accounting for fair value hedge basis adjustments in a non-decision-making meeting.|
|March 28, 2018||Board Meeting—The Board added the Last-of-Layer project to its technical agenda.|
The staff will draft a proposed Accounting Standards Update and distribute that staff draft for external review. Following external review, the staff will present to the Board any additional issues and an analysis of costs and benefits.
Supervising Project Manager
Postgraduate Technical Assistant
Postgraduate Technical Assistant