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FASB’s planned new multiple-hedge accounting model won’t bring more disclosure rules

Companies will not get more disclosure rules under a new multiple-hedge approach the Financial Accounting Standards Board (FASB) plans to propose, according to the board’s Jan. 22, 2020, discussions.

The board, without debate, said the related disclosures under Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, are sufficient.

ASU No. 2017-12 requires entities to disclose information about cumulative basis adjustments to last-of-layer hedges, a new accounting technique introduced under the standard. These disclosures will allow users to isolate fair value basis adjustments, which do not affect future cash flows, staff accountants told the board. “Although these disclosures were designed in contemplation of the current single hedge model, the relevant information for disclosure has not changed under the multiple hedge model, which simply brings the existing single hedge model to scale,” staff said.

Because the fundamentals of the last-of-layer method would not change under the multiple hedge model, staff members said they did not recommend that the board require any new disclosures to accommodate it. Staff members said they considered alternatives that would have required an entity to provide additional information about the future hedge amounts or the effects of changes in interest rates on a last-of-layer hedge, but felt it would be outside the scope of this current project.

The board also voted on transition requirements, deciding that companies should apply the rules prospectively because the multiple-hedge model does not exist today.

The last-of- layer method was one of the major changes to hedge accounting developed in ASU No. 2017-12, which was issued in 2017. The rules took effect in 2019 for public companies. It was deferred from 2020 to 2021 for private companies.

Accountants have been wrestling with how and when they are permitted or required to allocate the last-of-layer basis adjustment to individual assets or sub-pools within a closed pool. The FASB’s work addresses whether it is permissible for an entity to employ a multiple-layer hedging strategy to a closed portfolio.

FASB’s staff during its October 2019 meeting said they would draft a document of the board’s tentative views for external reviewers, a process it uses whereby outside practitioners study its decisions to determine whether its decisions are operational.

Staff accountants on Jan. 22, however, said they had to backpedal on the plan to vet the rules with external reviewers prior to disclosure and transition discussions, because workflow got backed up. Staff members therefore said they would now take the board’s tentative decision to external reviewers.

FASB Vice Chairman James Kroeker reiterated his October remarks that staff members reconsider changing the name of the project from “last-of-layer” method to something like the “layer method,” stating the current name does not properly reflect the project.

At a future meeting, the board will discuss new issues flagged by reviewers, a cost versus benefits analysis, and vote on whether to issue a proposal, according to the discussions.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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