The Financial Accounting Standards Board (FASB) has introduced targeted enhancements to accounting practices in the realm of hedging activities with the issuance of Accounting Standards Update (ASU) No. 2017-12, specifically addressing Derivatives and Hedging under Topic 815. Rather than a comprehensive overhaul, the focus of these amendments is on relieving the complexities of accounting rules for financial statement preparers and presenting hedge accounting information in a more digestible manner for financial statement users.
Key Highlights of ASU No. 2017-12:
Expanded Hedge Accounting Scope:
ASU No. 2017-12 brings about a significant shift by permitting hedge accounting not only for financial risk components but also for nonfinancial risk components. This expansion provides companies with increased flexibility in managing interest rate risk for both fixed and variable rate financial instruments. Noteworthy is the inclusion of the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as an eligible benchmark interest rate, broadening the range of options available to entities engaged in hedging activities.
Simplified Measurement Methodologies:
To streamline the process, the update eliminates the separate measurement and reporting of hedge ineffectiveness. For cash flow and net investment hedges, all changes in the value of the hedging instrument will now be deferred in other comprehensive income. The recognition in earnings will occur simultaneously with the hedged item affecting earnings, simplifying the accounting treatment and reducing complexities associated with tracking and reporting hedge ineffectiveness.
Cost Reduction Through Simplification:
ASU No. 2017-12 aims to reduce costs by simplifying the assessments of hedge effectiveness. Companies can now conduct subsequent assessments qualitatively, subject to specific conditions being met. Additionally, entities are granted more time for the initial quantitative hedge effectiveness assessment. Private companies, in particular, can align the timing of performance and documentation of initial and subsequent effectiveness testing with the issuance of interim or annual financial statements, providing them with greater flexibility in managing resources.
Enhanced Disclosures and Presentation:
The update also places a heightened emphasis on disclosures, aiming to enhance transparency. The presentation of hedge results has been modified to align more closely with the effects of the hedge. These changes are designed to provide financial statement users with clearer insights into the impact of hedging activities on a company's financial position and performance.
Effective Dates and Early Adoption:
ASU No. 2017-12 outlines specific effective dates for different entities. Public business entities are required to apply the standard for fiscal years beginning after December 15, 2018, and for interim periods within. Other entities have a later effective date, with the standard applicable for fiscal years beginning after December 15, 2019, and for interim periods beginning after December 15, 2020. Importantly, early adoption is permitted, enabling entities to proactively embrace the benefits of the updated guidance.
In conclusion, ASU No. 2017-12 marks a strategic move by the FASB to refine and simplify hedge accounting practices. The amendments not only address the complexities faced by financial statement preparers but also enhance the overall clarity and transparency of hedge accounting information for users. As entities navigate the evolving landscape of financial reporting, the newfound flexibility and simplicity introduced by this update are poised to have a positive impact on how companies manage and communicate their hedging activities.
About the Author:
Jennifer Louis boasts over 25 years of experience in designing and instructing high-quality training programs encompassing a diverse range of technical and soft-skills topics crucial for professional and organizational success. In 2003, she established Emergent Solutions Group, LLC, where her focus lies in crafting and delivering practical and engaging accounting and auditing training. Jennifer initiated her career in Audit with Deloitte & Touche LLP and graduated summa cum laude from Marymount University with a B.B.A. in Accounting.
In the evolving landscape of financial reporting, the Financial Accounting Standards Board's (FASB) introduction of Accounting Standards Update (ASU) No. 2017-12 signifies a pivotal moment in the refinement of hedge accounting practices. Rather than a sweeping transformation, these targeted enhancements under the Derivatives and Hedging framework (Topic 815) demonstrate a commitment to easing the burden on financial statement preparers and enhancing the accessibility of hedge accounting information for users.
The expansion of the hedge accounting scope, allowing for both financial and nonfinancial risk components, provides entities with a newfound flexibility in managing diverse risks. Notable additions, such as the inclusion of the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as an eligible benchmark interest rate, broaden the toolkit available to entities engaged in hedging activities.
Simplification takes center stage with the elimination of separate measurement and reporting of hedge ineffectiveness. The streamlined approach, particularly for cash flow and net investment hedges, is designed to simplify accounting treatments and reduce the intricacies associated with tracking and reporting ineffectiveness. This change is expected to result in clearer and more straightforward financial statements.
The emphasis on cost reduction is evident through simplified assessments of hedge effectiveness. The ability to conduct subsequent assessments qualitatively, along with extended timelines for initial quantitative assessments, provides companies with operational efficiencies. Private companies, in particular, benefit from the option to align the timing of effectiveness testing with the issuance of financial statements, optimizing resource utilization.
Enhanced disclosures and modified presentation methods aim to provide users with a more transparent view of the effects of hedging activities. By aligning the presentation of hedge results with the impacts on financial performance, financial statement users gain a more comprehensive understanding of a company's risk management strategies and their impact on financial position and performance.
With specific effective dates outlined for different entities, ASU No. 2017-12 offers a practical approach to implementation. Public business entities face an earlier application, while other entities have a more staggered timeline. The option for early adoption further empowers entities to proactively embrace the benefits of the updated guidance, aligning their practices with the evolving standards.
In summary, ASU No. 2017-12 represents a strategic move by the FASB to refine and simplify hedge accounting practices. The amendments introduced not only address the complexities faced by financial statement preparers but also enhance the overall clarity and transparency of hedge accounting information for users. As entities embrace these changes, the newfound flexibility and simplicity are poised to have a positive impact on how companies navigate and communicate their hedging activities in an ever-changing financial landscape.