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FASB - ASC815 Proposed changes / Jan 25, 2017
 

Proposed changes by FASB to ASC 815 are a positive step in a more complex risk management landscape

For some time, there has been pressure on the Financial Accounting Standards Board (FASB) to change and improve the hedge accounting model in Accounting Standards Codification (ASC) 815, also called FAS 133. The firms that use the hedging standards have stated that improvements to the hedge accounting model are required to allow financial reporting to more closely reflect an entity’s risk management activities. Also, market participants have pointed out that that the effect of hedge accounting on a firm or entity’s reported results makes it difficult for third parties to analyze and interpret those results, thereby leading to confusion and inaccurate assessments.

Accordingly, in September 2016, FASB proposed amendments to ASC 815. FASB tried to modify and improve the existing model instead of replacing it. The amendments in the proposed update would apply to any firm that chooses to apply hedge accounting in accordance with current US GAAP. The main areas of change include alignment of risk management activities and financial reporting, risk component hedging, refining the accounting for the hedged item in fair value hedges of interest rate risk, recognition and presentation of the effects of hedging instruments and certain other simplifications of hedge accounting guidance.

Some of the areas that would not change much include the threshold to qualify for hedge accounting and the three types of hedge accounting relationships that can be designated under the model. These are the fair value hedges, cash flow hedges and hedges of net investments in foreign operations.

The intention of the changes is to allow firms to depict the risk management activity more accurately and efficiently in their financial statements. The changes would better align the results of cash flow and fair value hedge accounting strategies with risk management activities by changing the designation and measurement guidance for qualifying hedging relationships, as well as the presentation of hedge results in the financial statements. Entities would be able to estimate earnings with greater precision when measuring changes in fair value of the hedged item in certain instances. Also, they would be able to align the timing of recognition of hedge results with the earnings effect of the hedged item for cash flow and net investment hedges. Furthermore, the effectiveness of an entity’s hedging program and the cost of executing that program would be easier to assess for the users of financial statements because the earnings effect of the hedging instruments would be included in the same income statement line item in which the earnings effect of the hedged item is presented.

The amendments would increase the number of strategies that can be used for hedge accounting. The changes should also help simplify hedge accounting in some scenarios. Firms also have more flexibility in measuring changes in fair value of hedged items. The proposed amendments would address specific limitations in current GAAP by expanding hedge accounting for both nonfinancial and financial risk components and by refining the measurement of hedge results to better reflect an entity’s hedging strategies.

In conclusion, with growing requirement for a more complex hedge accounting and risk management approach, the changes proposed by FASB should enhance the existing hedge accounting model under the US GAAP. They are more user-friendly because the number of strategies that can be utilized for hedge accounting purposes has increased, along with a reduction in the operational complexity and risk required with current strategies.

 

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60 Abele Road, Suite 1105, Bridgeville, PA 15017 ***Phone: 866-678-7600/412-221-7600 ***Fax: 412-221-7642
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