FASB Issues Narrow-Scope Improvements to Financial Instruments Standards

In August 2017, the Financial Accounting Standards Board released ASU No. 2017-12, accounting guidance designed to better align a hedge program with an organization’s risk management objectives as reflected on financial statements.


While the goal of these changes was to make hedging a more attractive option for corporations and financial institutions, stakeholders have brought up various nuanced implementation issues. The latest FASB update (ASU No. 2019-04) addresses and clarifies these issues.

Here’s a topline summary of the update and areas impacted:

Partial-Term Fair Value Hedging

We have already seen many strategies where employing the partial-term election has significantly improved hedge results of economically sound strategies.

As partial-term hedging grows in practice, some entities have questioned whether the ability to measure the change in fair value of a hedged item in a partial-term fair value hedge using its assumed term could be analogized to non interest rate risk.

  • The board clarifies that this guidance is only applicable to changes in hedged items due to interest rate risk, or both interest rate (IR) risk and foreign exchange (FX) risk. For changes in both risks, the change in value of the hedged item attributable to FX risk is measured on a spot to spot basis in accordance with 815-25-35-18.
  • The update also clarifies that: (1) There may be more than one separately designated partial-term fair value hedging relationship of a single hedged item outstanding at the same time. (2) For forward starting partial-term FV hedges, the issuance of the hedged item is assumed to occur at the start of the hedge period.

Amortizing Fair Value Basis Adjustments

The guidance has always left it up to hedging entities to decide when to begin amortizing the basis adjustments of the hedge items: either at the start, or, at the latest, when the hedged item ceases to be adjusted for changes attributable to the hedged risk (in other words, when the hedging is discontinued). Stakeholders have been concerned that these terms were changed under ASU 2017-12.

  • The amendment clarifies that this choice of elections has not changed under ASU 2017-12
  • The amendment further clarifies that the basis adjustment should be fully amortized by the hedged item’s assumed maturity date in the case of a partial-term hedge.

Fair Value Disclosure Requirements

ASU 2017-12 added some new disclosure requirements for fair value hedges, including a new table that shows the carrying amount of hedged assets and liabilities recognized in the statement of financial position along with the cumulative amount of fair value hedging adjustments recognized.

  • The amendment clarifies that the FX risk is excluded from the fair value hedging adjustments disclosed.
  • The amendment clarifies that available for sale (AFS) debt securities should be disclosed at amortized cost.

Hypothetical Derivatives & Cash Flow Hedging

The concept of hypothetical derivatives is not new. Under the old guidance, perfectly effective hypothetical derivatives (PEHDs) were constructed to both measure and test for effectiveness under cash flow hedging. Under the new guidance, they lost some of their importance and scrutiny in that measurement is no longer required. Hypothetical derivatives, however, are still used in quantitative effectiveness testing.

  • The amendment clarifies that the contractually specified interest rate should be considered when constructing the hypothetical derivative.
  • ASU No. 2019-04 also clarifies that reclassification of a held-to-maturity (HTM) debt instrument to an available-for-sale classification does not call into question:
    • All other HTM classifications of debt instruments
    • Nor does it require the instrument be designated in a last-of-layer hedge relationship
    • Lasty, the instrument can be sold at any time after reclassification
  • ASU 2017-12 eliminated the first payments received example of designating the changes in overall cash flows on a group of variable interest payments. The amendment clarifies that this strategy is still permitted under the new guidance.

Not-for-Profits & Private Institutions Last of Layer

The amendment extends the timing relief of quarterly hedge effectiveness assessments for certain not-for-profit companies. It also clarifies the timing of support required for private companies using the last of layer hedge strategy.

Qualitative Assertion Migration at Transition

FASB clarified that an entity may transition from a quantitative method of hedge effectiveness to a qualitative critical terms comparison (or match) approach without de-designating the original hedge relationship.

It is also permits a fair value interest rate hedge relationship to be rebalanced (without de-designation) at the time the hedge effectiveness methodology is modified. The proportion hedged can be increased or decreased but no new hedges or hedge items are permitted.

Transition Clarifications

For those public companies who’ve adopted ASU No. 2017-12, ASU No. 2019-04 adoption is required as of the first annual reporting period after April 25, 2019. Earlier adoption is permitted at any time. For those who’ve not yet adopted ASU No. 2017-12, ASU No. 2019-04 adoption follows the same effective dates and transition timing of ASU No. 2017-12.

For any of you still out there that haven’t adopted yet, there are a few clarifications of some of the elections available. If you have already adopted, don’t worry – none of the clarifications contradict what your Hedge Trackers consultants have helped you implement.