In anticipation of the new hedging guidance, here are a few best practices for a solid foundation before implementing the updates.
Expected later this year from the FASB, new hedge accounting guidance will provide more flexibility than the current rules, and will make hedge accounting a more attractive option for corporations and financial institutions. In addition to broadening the set of eligible hedge accounting transactions and streamlining ongoing requirements, the changes to hedge accounting guidance will include new disclosure requirements.
Now may be a good time to revisit current disclosure best practices, to ensure you are starting with a sound foundation as you prepare for compliance with the new rules. We, your Hedge Trackers Derivative Accounting Experts, recommend revisiting the three fundamental concepts underlying the disclosure requirements:
- Explain how and why an entity is using derivatives (or non-derivatives) in hedging relationships.
- Outline how derivatives/non-derivatives are being accounted for.
- Clarify how these instruments are impacting the entity’s Balance Sheet, P&L, and how changes in their value may impact liquidity.
Derivative transactions also impact additional disclosures related to other comprehensive income, fair value measurement, and balance sheet presentation/netting. Most of the information required to address these disclosures will be available from addressing the core derivative disclosure requirements described above.
We’d recommend taking a fresh look at your current derivative disclosures and supplementing as needed. Is the context and level of derivative activity clear from your footnote? Are all quantitative requirements addressed? Handling the current data challenges and preparing disclosures “by-the-book” now, will smooth the transition to the new rules later. More discussion about the new disclosure requirements will be forthcoming and Hedge Trackers is available to assist you with any of your hedge accounting related topics.