FASB Issues New Hedging Standard

On August 29, 2017, the FASB issued a final ASU that will improve and simplify accounting rules around hedge accounting. The ASU is effective for public companies in 2019 and private companies in 2020. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard (i.e., as early as in the current quarter, Q3’17).

• The final ASU
• In the News
• FASB in Focus
• Understanding Costs and Benefits
• Heads-up: New hedging standard coming your way

New hedging standard - Benchmark Interest Rates

Under the current guidance [ASC 815], companies are limited to hedging the following benchmark interest rates only:

·         Interest rates on direct Treasury obligations of the U.S. government (the U.S. Treasury Rate)

·         London Interbank Offered Rate (LIBOR) Swap Rate

·         Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate or OIS)

The new hedging standard will newly allow i) any contractually specified interest rates and ii) Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate to be designated as the hedged interest rate risk.

i) Cash flow hedges of variable-rate financial instruments

·         The concept of benchmark interest rate will be eliminated.

·         An entity may designate any contractually specified interest rate as the hedged risk in cash flow hedges of interest rate risk. For example, a bank could hedge the variability in cash flows of a variable-rate loan based on its own prime rate as long as the rate is contractually specified in the loan.

·         An entity may designate as the hedged risk only the change in cash flows of the contractually specified interest rate index, not an implied rate embedded in the interest rate index. For example, if an entity issues variable-rate debt based on its own prime rate, it cannot designate the change in cash flows of the Fed Funds Target rate or the Wall Street Journal prime rate as the hedged risk.

ii) Fair value hedges of fixed-rate financial instruments

·         The concept and definition of the term benchmark interest rate and list of the current eligible benchmark interest rates (see above) is retained.

·         The SIFMA Municipal Swap Rate is added to the list of permissible benchmark rates, which would allow an entity that issues or invests in fixed-rate tax-exempt financial instruments to designate as the hedged risk changes in fair value attributable to interest rate risk related to the SIFMA Municipal Swap Rate rather than overall changes in fair value.

·         SIFMA is the average rate at which high-credit-quality U.S. municipalities may obtain short-term financing and currently is the predominant rate referenced in issuances of variable-rate municipal bonds. For that reason, the FASB believes that it should be considered a benchmark rate.

·         If an entity modifies a tax-exempt financial instrument’s hedged risk from total price risk to interest rate risk related to the SIFMA Municipal Swap Rate, the modification would be considered a dedesignation and immediate redesignation of the hedging relationship. In this situation, the cumulative basis adjustment of the hedged item from the dedesignated hedging relationship would be amortized to earnings over the remaining life of the hedged item on a level-yield basis.

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

ASU 2014-15 Going Concern Assessment

ASU 2014-15 Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern is effective December 31, 2016 for calendar year-end companies.

For 2016 calendar year companies, management is required to apply the new guidance (i.e., ASU 2014-15) related to the assessment of the reporting entity’s ability to continue as a going concern. Management is required to consider events and conditions up to and within one year from the issuance date of the financial statements to determine if conditions exist, or will exist, that give rise to “substantial doubt” about the company’s ability to meet its obligations. If it is determined that substantial doubt exists, certain disclosures are required, regardless of whether such doubt is alleviated by management’s plans.

On August 27, 2014, the FASB issued ASU 2014-15, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

Additional information:

Accounting Standards Update No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
PwC In depth FASB defines management’s going concern assessment and disclosure responsibilities
EY To the Point - FASB requires management to assess an entity’s ability to continue as a going concern 
BDO FASB Flash Report - September 2014
Deloitte Heads Up — FASB Issues ASU on Going Concern

FASB Issues New Guidance on Accounting for Credit Losses

On June 16, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) (the “ASU”) that improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The new ASU will impact both financial services and non-financial services entities.

 

Highlights from FASB News Release on 06/16/16

 

 

The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates...

 

The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements.

 

Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

 

The ASU will be effective for SEC filers in fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years beginning after December 15, 2021. Early application of the guidance will be permitted for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

 

Additional Information:

• ASU FASB ASU 2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
• FASB In Focus: Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326)
• FASB Understanding Costs and Benefits: Accounting Standards Update, Credit Losses (Topic 326)
• KPMG Defining Issues: FASB Accelerates Recognition of Credit Losses
• EY To the Point - FASB issues sweeping changes to credit loss guidance
• Deloitte Heads Up — FASB issues standard on accounting for credit losses
• PwC In brief - Allowance for loan and lease losses – FASB issues final impairment standard
• GT On the Horizon -- FASB issues new standard on measuring credit losses
• BDO FASB Flash Report - FASB Issues ASU on Credit Losses on Financial Instruments

Understanding the Impact of ASU 2012-06

Deloitte Banking & Securities Alert

October 25, 2012

Background

On October 23, 2012, the FASB issued ASU 2012-06,1 which clarifies existing guidance on the subsequent measurement of an indemnification asset recognized as a result of a government-assisted acquisition of a financial institution. ASC 8052 specifies that an acquirer must record an indemnification asset at the same time as it recognizes the indemnified item in a business combination. The indemnification asset is initially measured on the same basis as the indemnified item (with a valuation allowance for amounts deemed uncollectible) and is subsequently also measured on the same basis as the indemnified item, subject to any contractual limitations on the asset’s amount (including an assessment of its collectibility when it is not measured at fair value).

The ASU was issued to eliminate the current diversity in practice in the interpretation of the terms “on the same basis” and “contractual limitations” in ASC 805-20 with respect to a government-assisted acquisition of a financial institution. Specifically, these terms have been interpreted differently when the performance of the indemnified asset has improved and the indemnification asset’s expected performance has therefore deteriorated. In such circumstances, most entities either (1) amortize the deterioration in the indemnification asset over the shorter of the remaining term of the loss-sharing agreement (LSA) or the term of the acquired loans or (2) impair the indemnification asset and recognize the impairment charge (i.e., the entire decrease in expected cash flows) immediately in earnings.

What Changed?

ASU 2012-06 clarifies that when a reporting entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and there is a subsequent change in the amount of cash flows expected to be collected on the indemnified asset, the reporting entity should subsequently measure the indemnification asset on the same basis as the underlying loans by taking into account the contractual limitations of the LSA. For amortization of changes in value, the reporting entity should use the term of the LSA if it is shorter than the term of the acquired loans.

What Is the Scope of the ASU?

ASU 2012-06 affects both public and nonpublic entities that recognize, as part of a business combination, an indemnification asset (in accordance with ASC 805-20) that the government provides as part of a government-assisted acquisition of a financial institution. One example is a business combination for which the Federal Deposit Insurance Corporation (FDIC) enters into an LSA with the acquiring bank. The ASU does not apply to situations in which the indemnified asset is subsequently measured at fair value, and its scope does not expand beyond government-assisted acquisitions of a financial institution.

Example

Acquirer A purchases a pool of loans with a remaining term of 15 years as part of an FDIC-assisted bank acquisition (which meets the definition of a business). At acquisition, the acquired loans had a par value of $2 million and a fair value of $1 million (because of deteriorations in credit quality). In addition, the FDIC entered into an LSA with Acquirer A to reimburse 80 percent of certain losses on covered loans for the next five years. At acquisition, the fair value of the indemnification asset provided by the FDIC was assumed to be $400,000. After the acquisition date, the expected cash flows on the acquired pool of loan increased by $250,000 (which was accreted into income over the life of the pool of loans in accordance with ASC 310-30-35-2). As a result, the expected cash flows from the existing indemnification asset decreased by an assumed amount of $190,000, as determined under the terms of the LSA, and this amount would be amortized (on the same basis as the underlying loans) over the remaining term of the LSA.

What’s Next?

The amendments should be applied prospectively for fiscal years beginning on or after December 15, 2012 (and interim reporting periods within those years). Early adoption is permitted. The ASU applies to the unamortized balance of any existing indemnification assets as of the adoption date (rather than only to future changes in expected cash flows of unamortized indemnification assets existing as of the adoption date). Upon adoption, the amortization period for the remaining unamortized balance would be shortened to the remaining contractual life of the LSA, with the effect recorded in earnings for the period.

__________________

1 FASB Accounting Standards Update No. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution — a consensus of the FASB Emerging Issues Task Force.

2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

27 May 2010: FASB proposals on financial instruments, comprehensive income

The US Financial Accounting Standards Board (FASB) has issued exposure drafts (EDs) of proposed accounting standards on financial instruments and comprehensive income. Both relate to joint projects with the IASB. The IASB has already:

Information about IFRS 1 First-time Adoption of IFRSs

• Summary of IFRS 1 First-time Adoption of IFRSs
• Issues Relating to IFRS 1 that IFRIC Did Not Add to Its Agenda
• IASB Updates Standard on First-time Adoption – Newsletter explaining the December 2008 restructured version IFRS 1.
• Deloitte Guide to IFRS 1
• IAS Plus Update Newsletter – Additional Exemptions for First-time Adopters. Newsletter about amendments to IFRS 1 in July 2009 that give additional exemptions to first-time adopters of IFRSs.
• November 2009 ED Proposes IFRS 7 Disclosure Relief for First-time Adopters

PCAOB Proposes New Auditing Standard on Confirmation

PCAOB가 기업회계감사시 감사인이 사용하는 "조회" 절차에 대한 기존의 기준 (AU 330) 을 강화하고 현대화하는 새로운 감사기준을 제안했으며 9월 13일까지 그에 대한 공개의견을 묻는다는 내용 ...

The PCAOB today approved for public comment a proposed audit standard, Confirmation. The proposed standard would strengthen the requirements under the current auditing standard, AU sec. 330, The Confirmation Process, which it would replace. Comments are due Sept. 13, 2010.

PwC FlashLine 2008-43 (October 23, 2008)

PricewaterhouseCoopers - 10.23.08

PwC's weekly accounting and auditing alert. This week's topics include:

• PwC DataLine Highlights New Disclosure Requirements for Credit Derivatives and Certain Guarantees
• FASB and IASB Announce Further Details on Global Approach to Credit Crisis
• EITF Agenda Committee Adds Two Items to EITF Agenda
• PCAOB Proposes Seven New Risk Assessment Standards

PCAOB Proposes Seven New Risk Assessment Standards

The Public Company Accounting Oversight Board (PCAOB) has decided to propose seven new auditing standards related to the auditor's assessment of and responses to risk. The proposed standards would realign the existing subject matter of several PCAOB interim standards into a topical framework that is common with the recently-clarified risk assessment standards of the International Auditing and Assurance Standards Board (IAASB).

EITF Agenda Committee Adds Two Items to EITF Agenda

The Emerging Issues Task Force (EITF) Agenda Committee met on October 10 and discussed two potential new issues:

• Accounting for Share Lending Arrangements in Contemplation of Convertible Debt Issuances and the Related Determination of Earnings per Share
• Selected Statement 160 Implementation Questions

FASB and IASB Announce Further Details on Global Approach to Credit Crisis

The FASB and the International Accounting Standards Board (IASB) have announced further details about their joint effort to deal with reporting issues arising from the global financial crisis.

PwC DataLine Highlights New Disclosure Requirements for Credit Derivatives and Certain Guarantees

In September, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position (FSP No. FAS 133-1 and FIN 45-4) that (1) introduces new disclosure requirements for credit derivatives and certain guarantees and (2) clarifies the effective date of FASB Statement No 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161). The new disclosure requirements are aimed at providing financial-statement users with similar disclosures for financial instruments with similar risks and rewards relating to credit risk, regardless of their legal form as a credit derivative or guarantee arrangement.

Amendment to IAS 39, 'Financial instruments: Recognition and measurement'

On 13 October 2008, the IASB agreed to amend IAS 39, 'Financial instruments: Recognition and measurement', to allow the reclassification of certain financial assets previously classified as 'held for trading' or 'available for sale' to another category under limited circumstances.

Breaking News: FASB Issues Clarifying Guidance on Determining Fair Value of Financial Assets in Markets That Are Not Active

The Financial Accounting Standards Board (FASB) issued guidance clarifying how FASB Statement No. 157, Fair Value Measurements (FAS 157), should be applied when valuing securities in markets that are not active. The guidance, released as a FASB Staff Position (FSP), provides an illustrative example that applies the objectives and framework of FAS 157 to determine the fair value of a financial asset in a market that is not active. It also reaffirms the notion of fair value as an exit price as of the measurement date.

SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting

Washington, D.C., Sept. 30, 2008 — The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC's Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.

Alert: SEC Registrants May Need to Update Their Shelf Registration Statements by December 2008

In 2005, the SEC revised its shelf registration rules to provide an "expiration date" for many shelf registration statements*. A shelf registration statement that is subject to expiration may not be used to offer securities more than three years after the registration statement's initial effective date (subject to a limited grace period). The SEC's "expiration date" rules became effective December 1, 2005. For shelf registration statements that became effective before December 1, 2005, the expiration date is December 1, 2008.

The three-year expiration date rule affects the following types of securities:

• Securities registered on an automatic shelf registration statement: Any automatic shelf registration statement filed by a well-known seasoned issuer, for any type of offering, is subject to the three-year limitation.
• Securities offered on a delayed or continuous basis: These offerings include universal equity and debt registration statements and are generally registered on Form S-3 or Form F-3 (Rule 415(a)(1)(ix) or (x) of Regulation C).
• Mortgage-related securities: These include securities such as mortgage-backed debt and mortgage participation or pass through certificates (Rule 415(a)(1)(vii) of Regulation C).
  

*Many SEC registrants maintain effective "shelf" registration statements (usually filed on Form S-3 or Form F-3). These registration statements are referred to as "shelf" registration statements because the process of registering securities (including SEC staff review) takes place on the front-end of the process. When the decision is made to offer the securities for sale, they are "taken off the shelf" with no further review/involvement by the SEC staff.

Note: The purpose of this tip is to raise awareness of the potential expiration of many shelf registration statements in order to avoid the possibility that access to the capital markets may be interrupted. Registrants should consult with their securities counsel for specific information about the SEC's three-year shelf expiration date rules as well as the potential availability of a "grace period."

Other-Than-Temporary Impairment (OTTI)

Many debt and equity securities that are accounted for in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (FAS 115), have experienced significant and extended declines in fair value due to current economic conditions. Companies should consider whether these declines represent an "other-than-temporary impairment" (OTTI). If they do represent an OTTI, companies will have to recognize any unrealized OTTI losses stemming from such debt and equity securities in earnings.

Breaking News: FASB Delays Issuance of a Standard on Disclosure of Certain Loss Contingencies

Source: PricewaterhouseCoopers Author name: PwC assurance services
Published: 09/24/2008

Summary:Today, the Financial Accounting Standards Board announced its intentions to re-deliberate the proposal that would require new disclosures of certain loss contingencies intended to replace the loss contingency disclosures required by FASB Statement No. 5, Accounting for Contingencies (FAS 5), and FASB Statement No. 141(R), Business Combinations (FAS 141(R)). These actions will delay the issuance of any new standard until sometime in 2009. The FASB's decision is an acknowledgement of the concerns expressed about its proposal and the time it will take to further study and deliberate the issues raised by constituents during the comment period.