FX Hedgers: What You Need to Know About the New Hedge Accounting Exposure Draft

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Hedge accounting is changing – for the better!

There are a few items in FASB’s Sept. 8 Exposure Draft that should be noted, as these will affect all foreign currency hedgers taking special hedge accounting:

  • Effectiveness measurement is expected to be eliminated for companies hedging foreign currency risk. All changes in cash flow hedges will be recorded in equity in other comprehensive income until the hedged item is recorded.
  • Once hedge effectiveness is established at inception, ongoing retrospective and prospective effectiveness testing can be replaced with qualitative assurances that the critical terms of the hedged item have not changed.
  • Initial quantitative effectiveness testing is no longer required “contemporaneously” with hedge execution, but will be required before the earlier of the date financial statements are issued for that quarter or when the hedge relationship is terminated.
  • All changes in the hedge contract will impact the hedged item line item in the income statement. You can continue to exclude time value, but no longer will you be able to record the excluded portion to Other Income when hedging revenue or expense. In fact the effective component must be reported in the same line as the hedged item, as all financial statement geography discretion has been removed.
  • Disclosure tables have changed and more disclosures will be required.

For more information on these recent accounting changes, contact us at 408-350-8580 or visit hedgetrackers.com.