Heads-up: New hedging standard coming your way

During the third quarter of 2017, the Financial Accounting Standards Board (FASB) is expected to issue a new standard that will improve and simplify hedge accounting. The new standard will take effect for public companies in 2019 and private companies in 2020. Early adoption will be permitted upon issuance. Companies may want to evaluate whether the early adoption is feasible and the benefit of applying the new guidance (even those that do not currently apply hedge accounting).

The new guidance will:

·         Expand hedge accounting for nonfinancial and financial risk components to allow entities to qualify for hedge accounting for more of their risk management activities;

·         Decrease the complexity of preparing and understanding hedge results by eliminating the separate measurement and reporting of hedge ineffectiveness;

·         Enhance transparency, comparability, and understandability of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and

·         Reduce the cost and complexity of applying hedge accounting by simplifying the way assessments of hedge effectiveness may be performed.

The new standard will include a number of changes that will impact all areas of hedge accounting, including (but not limited to) financial and nonfinancial hedges, the timing of documentation, effectiveness testing, and presentation and disclosure. Summarized below are some of the key changes:

·         Benchmark Interest Rates

·         Nonfinancial Hedges

·         Recognition and Presentation of Changes in the Fair Value of Hedging Instruments

·         Fair Value Hedges of Interest Rate Risk

·         Shortcut Method and Critical Terms Match (CTM) Method

·         Documentation and Effectiveness Testing

·         Disclosures

·         Transition