Corporate Hedging Strategies May Change Under New Accounting Guidance
On June 7, 2017 members of the FASB unanimously confirmed their intention to approve the Accounting Standards Update Derivatives and Hedging, which will simplify certain aspects of hedge accounting and better align an entity’s financial reporting with its risk management activities. Corporate hedgers will be impacted most by the following changes:
- Companies will be able to more easily hedge non-financial risk (i.e., commodity risk) by designating a specific risk component of a hedged item, rather than designating the overall changes in fair value as is required today.
- Hedge ineffectiveness will no longer be separately measured; instead, it will be recorded only when the hedged transaction affects earnings and presented in the same income statement line item where the earnings effect of the hedged item is presented.
- Although a quantitative effectiveness assessment will still be required at inception, the proposal will permit companies to qualitatively assess certain hedges thereafter as long as no changes have occurred in the hedging relationship.
- Companies with fixed-rate debt will be permitted to designate partial term hedges and also designate a benchmark interest rate instead of designating the total coupon rate as is required today.
Each of these changes will impact corporate hedging strategies differently. Please see the additional discussion documents to walk through our views on the key changes to:
- Presentation (including ineffectiveness timing and geography)
- Effectiveness assessments
- Commodity hedge accounting
- Foreign currency hedge accounting
- Interest rate hedge accounting for variable rate debt
- Off-market interest rate hedge accounting for variable rate debt
The updated guidance won’t change today’s requirement to prepare contemporaneous documentation that clearly outlines the hedging relationship, and to perform effectiveness testing at inception and thereafter to show that the hedge is expected to be “highly effective.”
Contact us to learn more about our 8-Step Transition and Implementation Process.
Chatham Financial has followed this project very closely over the past several years and has worked closely with the FASB to help shape the new guidance. We are happy to answer your questions and help you understand the potential impact the new guidance may have on your hedging program.
Phone: +1 610.925.3120