FASB expands hedge accounting scope across five areas 

The Financial Accounting Standards Board (FASB) has introduced an Accounting Standards Update (ASU) that expands the scope of hedge accounting. 

The update addresses five main areas, allowing companies to apply hedge accounting in various scenarios involving “highly effective” economic hedges. 

Under the update, the assessment of similar risks in cash flow hedges has been broadened.  

This enables entities to group a greater variety of forecasted transactions for hedge accounting, which may lead to more comprehensive coverage of forecasted transaction portfolios. 

For choose-your-rate debt instruments, the ASU sets out a model that increases the situations where hedge accounting can be used on forecasted interest payments. The changes are intended to reduce variability in current industry approaches. 

FASB said that companies can now apply hedge accounting to certain anticipated purchases and sales of nonfinancial assets if they meet specified criteria. 

Regarding net written options as hedging instruments, the updates consider changes in loan and swap markets stemming from reference rate reform. 

In some circumstances, the requirement for the net written option test is removed. 

The ASU also addresses dual hedge strategies involving foreign-currency-denominated debt instruments.  

It removes recognition and presentation mismatches when such an instrument is both the designated hedging instrument in a net investment hedge and the hedged item in a fair value hedge for interest rate risk. 

FASB chair Richard Jones said: “The new standard clarifies the application of previous guidance and addresses emerging issues identified by stakeholders, including those related to reference rate reform. 

“The improvements will better reflect the economics of organisations’ risk management activities.” 

Recently, FASB completed a post-implementation review of its leases standard. 

In its report, FASB stated while it achieved its overall objective, the initial costs to implement the lessee requirements along with the ongoing costs to apply those requirements were higher than the FASB expected at issuance. 

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