Impact of Upcoming FASB Changes on Cash Flow Interest Rate Hedgers

In Q3, the FASB is expected to issue an Exposure Draft containing sweeping changes to hedge accounting. Though the Draft’s exact wording has not been released, the preview includes exciting changes for the corporate hedging community.

This post is Part 3 of a series highlighting expected changes by hedge type. Part 1 focuses on commodities; Part 2 focuses on FX Hedges.

Cash Flow Interest Rate Hedges & FASB Changes: What You Need to Know

Most critical for those designating interest rate swaps as cash flow hedges is the expected elimination of ineffectiveness – the whole concept of ineffective amounts. Once the expectation of being highly effective is met, derivatives will be marked to market with the total offset recorded in other comprehensive income (equity), even when there are known differences between the derivative and the hedged item. In addition, the benchmark hedge accounting treatment is expected to expand to include any contractually specified interest rate index. The expansion will open up interest rate hedging to include prime and other published interest rates.

Other expected highlights in the coming Exposure Draft:

  • The elimination of both the retrospective and the ongoing prospective effectiveness testing unless critical terms of the hedged item change
  • The documentation of a “back-up test” in the event short-cut treatment is denied
  • Initial quantitative effectiveness testing no longer required “contemporaneously,” but by quarter end after designation date

On the downside, additional disclosures – the details of which are being hammered out – are expected to include a table of P&L impact by line item and discussion of the quantitative objectives of the hedge program.

Once the Exposure Draft is issued, there will be a comment period (typically 30-60 days long). We encourage all interested parties to participate by writing letters that support the changes that you like as well as commenting on what you don’t like or what needs further clarification.

We will continue to monitor FASB developments and post them to the Hedge Trackers blog. If you’d like to receive our FASB Updates directly in your inbox, sign up for our newsletter.