Yesterday, August 28th, 2017, FASB issued a new standard that aims to simplify hedge accounting for financial statement preparers and users. Before looking into the specifics of the new FASB standard, it's important to note that it will take effect for public companies beginning December 15th, 2018 and one year later on December 15th, 2019 for private companies. Keep in mind that early adoption of this standard is permitted.
FASB's biggest goal when creating this new standard was to address the concerns of both preparers and users who had difficulty understanding the presentations of hedge accounting information that exists under GAAP.
FASB Chairman Russell Golden, Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, stated that the new standard was created to:
- Better align accounting rules with a company’s risk management activities.
- Better reflect the economic results of hedging in the financial statements.
- Simplify hedge accounting treatment.
The key to the new standard is transparency around the presentation of economic results on financial statements and in the footnotes. But, according to the Journal of Accounting, the standard takes a three-pronged approach toward improving accounting rules by focusing on:
- Measurement and hedging strategies.
- Presentation and disclosure.
- Easing the administrative burden that hedge accounting can create for preparers.
According to an article from within FASB in Focus that's devoted to the standard, preparers will:
- Measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
- Consider only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity when calculating the fair value of the hedged item.
- Measure the fair value of the hedged item using the benchmark rate component of the contracted coupon cash flows determined at conception.
Hedge accounting has proven to be a very tedious and burdensome to both statement preparers and users and the new FASB Standard will make the process easier to understand for everyone but it will not help make your accounting processes automatic.
In order to get the most out of your hedge accounting, or accounting processes in general, the latest industry trends all point toward automated accounting solutions.