Hedge Accounting Exposure Draft: Key Items Agreed Upon at Recent FASB Meeting

The FASB met recently to discuss the results of the public outreach. They collated the input from 15 comment letters, 30 investors, 2 public roundtables with 18 participants each and the private company council meeting on December 13th.

Overall, the input was quite positive and the staff recommended that the following items be affirmed:

Fair value IR hedging – partial term, prepayable, benchmark component

  • Entity allowed to measure changes in hedged item using a term that reflects the designated cash flows hedged only (i.e. partial term)
  • Entity allowed to consider how changes in the benchmark interest rate ONLY affects the decision to settle a debt instrument prior to scheduled maturity for prepayable financial instruments.
  • Entity allowed to use only the benchmark component of the coupon (rather than the total coupon) to measure changes in fair value of the hedged item in a benchmark hedge.
  • Market yield to be discussed further in the March 8 FASB meeting

Cash flow hedging – component hedging

  • For the forecasted purchase of nonfinancial assets, an entity could designate the variability in any “contractually specified component” as the hedged risk.
  • For variable rate financial instruments, an entity could designate the variability in any “contractually specified interest rate.”

Extended time to complete the quantitative inception test

  • An entity would have until the end of the first quarter after designation (with a number of exceptions)
  • Board clarified this is for public companies

Critical terms match

  • For a group of forecasted transactions, an entity may assume critical terms match as long as the forecasted transactions occur and the derivative matures within the same 31 day period.

Shortcut method

  • Entity allowed to document at designation a long-haul backup effectiveness test to use if it is later determined that the shortcut method was not appropriate OR is no longer appropriate.

All seven board members voted to affirm the above items.

Click here to see the next steps for the FASB exposure draft on hedging.