New rules that are expected to improve and simplify hedge accounting are one step closer to being issued, as the Financial Accounting Standards Board (FASB) voted on June 7 to proceed with finalizing the hedging standard.
The final Accounting Standards Update (ASU) is expected to be released in August.
“Over the past year, the FASB has received overwhelmingly positive feedback on the proposed changes to the hedge accounting model from both companies and investors,” FASB Chairman Russell Golden said in a prepared statement. “The resulting standard will better align the accounting rules with a company’s risk management activities, better reflect the economic results of hedging in the financial statements, and simplify hedge accounting treatment.”
Stakeholders had indicated to the FASB that the effect of hedge accounting on an entity’s reported results can be tough to understand and interpret. They wanted reported results to better help financial statement users understand risk exposures and how hedging tactics manage those exposures.
Under the new standard, hedge accounting would be refined and expanded for both financial risks (such as interest rate risks) and commodity risks. The economic results of hedging activities would be presented in a more transparent way, both on the face of the financial statements and in the footnotes, for investors and analysts, according to the FASB.
“Overall, these proposed amendments would be an improvement because an entity’s financial statements would reflect more accurately and comprehensively the intent and outcome of its hedging strategies,” the proposed ASU states.
An exposure draft of the new standard released last September generated 60 comment letters. The FASB held numerous discussions with stakeholder groups, investors, and other financial statement users.
The board also held two public roundtables and meetings with the Private Company Council to discuss private company hedge documentation issues.
The new standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, for public companies. For private companies, the standard will go into effect for fiscal years beginning after Dec. 15, 2019, and interim periods for fiscal years beginning after Dec. 15, 2020.
Early adoption will be permitted in any interim period or fiscal year before the effective date of the standard.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.