The message from participants at this month’s FASB roundtable was clear: The pursuit of a “perfect” update to ASC 815 shouldn’t get in the way of a timely release of the current “good enough” draft.
The significant changes to hedge accounting rules proposed by the FASB were generally well received, with the elimination of ineffective amounts so widely acclaimed that no conversation was necessary and the bifurcation of the contractual component of risk being tagged as “good enough” – although something more akin to separately identifiable and reliably measured would have been “perfect.”
The least popular aspects of the proposal were the disclosure of quantitative objectives and (surprisingly) the requirement for gains and losses to follow the hedged item reporting in earnings. It was banks, not corporate derivative users, who objected most strenuously to the income statement geography mandate. While corporates were more concerned with reporting elements, like excluded time value being recorded in revenue in a different year than the hedged item, banks were focused on the impact on earned interest margin reporting, a key financial metric in banking that financial institutions noted might drive them towards non-GAAP reporting.
The least popular aspects of the proposal were the disclosure of quantitative objectives and (surprisingly) the requirement for gains and losses to follow the hedged item reporting in earnings.
Participants commented on their interpretations relative to inception testing and the possible need for subsequent testing. Many agreed that they understood the proposal to support testing of numerous potential hedged item scenario outcomes to avoid a need to return to quantitative testing over a derivative’s life. The FASB probed on the impact of derivative designation timing requirements for private companies, understanding that while derivative execution is compulsory for many companies to secure debt financing, many do not have the in-house technical expertise to evaluate and implement designation requirements.
The FASB invited early commenters on the exposure draft to participate in this roundtable designed to further educate the Board members and staff on practical concerns related to implementation of the proposal. They were rewarded with a group of participants that supported their efforts as well as the progress made in the development of the proposed update. The Board welcomed a few new insights and shared their perspectives in the document’s design. It was a stimulating and nuanced discussion – those of us who eat, sleep and drink derivative accounting thought it was “perfect.”