Financial Reporting: The FASB Finalizes Changes to Hedge Accounting Guidance

Overview

On August 28, 2017, the FASB issued ASU 2017-12 with the objective of “improving [a company’s] reporting of hedging relationships to better portray the economic results of [the company’s] risk management activities in its financial statements.” The FASB’s hope is that the changes made will also “simplify the application of the hedge accounting guidance.”

Among other things, ASU 2017-12: (a) expands the types of transactions eligible for hedge accounting; (b) eliminates the separate measurement and presentation of hedge ineffectiveness; (c) simplifies the requirements around the assessment of hedge effectiveness; (d) provides companies more time to finalize hedge documentation; and (e) enhances presentation and disclosure requirements. (See “Key Changes” section for additional information.)

Transition Guidance

For public companies, the changes to the existing hedge accounting model take effect in fiscal years (and interim periods therein) beginning after December 15, 2018. For all other entities, ASU 2017-12 takes effect in fiscal years beginning after December 15, 2019 and in interim periods beginning after December 15, 2020. Early adoption is permitted for all companies.

If a company elects to early adopt ASU 2017-12 in an interim period, any adjustments arising from adoption of the new guidance must be reflected as of the beginning of the fiscal year in which the interim period occurs.

ASU 2017-12 generally prescribes a “modified retrospective approach” for adopting the new guidance. That is, any changes resulting from adopting the new guidance would be recorded as an adjustment to the opening balance of retained earnings as of the date of initial application. However, the transition provisions allow for certain exceptions (some of which are enumerated in the Key Changes section).