FASB plans to streamline hedge accounting with upcoming proposal

The FASB on June 4, 2024, voted to issue a proposal to address six issues in hedge accounting, aiming to clarify existing guidance and simplify the application of hedge accounting in certain areas.

The proposal will be issued with a 60-day comment period, considering the narrow nature of the amendments, and the complexity of the issues being addressed.

The guidance would apply to all entities, the board agreed. Early adoption would be permitted on any date after the issuance of a final update.

"I just would emphasize on any date means on any date - it doesn't mean as of the beginning of the period or the reporting period, it means any date," FASB Chair Richard Jones said.

The proposal would aim to improve hedge accounting, specifically in the areas of cash flow hedges, fair value hedges, and net investment hedges. The guidance would clarify existing guidance, reduce uncertainty and diversity in practice, and address inconsistencies in the application of hedge accounting rules, according to the discussions.

FASB members said the potential benefits would justify the potential implementation costs, as companies would benefit from simplified ongoing effectiveness and similar risk assessments, expanded population of valid economic hedging strategies, and the ability to better reflect their risk management strategies in their financial statements.

"I agree that this should apply to all entities, FASB member Marsha Hunt said. "I'm comfortable with early adoption, and I am excited about the direction this project is going overall."

The proposal would provide more decision-useful information to investors, help to eliminate potential earnings volatility, and better align what companies are doing economically with the accounting.

"Quite importantly, the proposed amendments will help eliminate potential earnings volatility, and as we know, that volatility obfuscates the substance of the economic hedges in the financial statements, so I think that is yet to another significant benefit for investors," said FASB member Joyce Joseph.

In discussions, board members generally agreed the benefits of the amendments justify the potential costs, emphasizing improved alignment of companies' economic activities with accounting and enhanced investor information.

"I view these proposals as further advancing that effort that we started with ASU 2017-12 that was to improve hedge accounting by better reflecting the economics and the financial statements, and also reducing the cost and complexity of applying the model," FASB member Christine Botosan said.

Transition requirements were also discussed, with the board agreeing to focus on prospective application and necessary adjustments for existing hedges to benefit from the new amendments. Transition disclosures will be proposed on the nature and reason for accounting changes and the method of application.

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