FASB proposes updates to clarify hedge accounting guidance

The Financial Accounting Standards Board (FASB) has released a proposed Accounting Standards Update (ASU) to refine hedge accounting guidance.

This proposed update is a response to the global reference rate reform and stakeholder feedback, seeking to enhance the representation of economic hedging activities in financial statements.

In 2017, FASB introduced ASU No. 2017-12, which was designed to more accurately reflect an entity’s risk management activities and simplify hedge accounting application.

However, during the FASB’s 2021 agenda consultation project, stakeholders highlighted issues where the current guidance might prevent the application of hedge accounting for effective hedging relationships, thus reducing the usefulness of information for investors.

The proposed ASU seeks to address these concerns by allowing more economic hedges to qualify for hedge accounting, which would provide investors with more decision-useful information.

Stakeholders have also pointed out specific areas within the hedge accounting guidance that need updating to accommodate the ongoing reference rate reform.

The proposed amendments would be applied prospectively to existing hedging relationships from the date of adoption, with early adoption permitted for all entities post-final update issuance.

The effective date for these amendments will be established once FASB has reviewed stakeholder feedback on the proposed changes.

Upon adopting the proposed amendments, entities may need to adjust the terms of certain hedging relationships.

These modifications would be made without the necessity of designating the hedge anew, streamlining the transition process for affected entities.

In August 2024, FASB introduced a new chapter to its Conceptual Framework, which addresses the recognition and derecognition of items in financial statements.

“FASB proposes updates to clarify hedge accounting guidance ” was originally created and published by The Accountant, a GlobalData owned brand.

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