The Financial Accounting Standards Board (FASB) has proposed an accounting standards update (ASU), designed to align hedge accounting with businesses’ risk management strategies.
The body has encouraged stakeholders to review and comment on the changes issued by July 5, 2021.
The proposal follows a 2017 hedging standard that was introduced to better align the economic results of risk management activities with hedge accounting.
The organization claimed that the standard “increased transparency around how the results of hedging activities are presented” in financial statements and footnotes.
A major feature of the 2017 standard was the addition of a last-of-layer hedging method, allowing an entity to hedge its exposure to fair value changes due to interest rate fluctuations for a portion of a prepayable financial instrument portfolio that is not expected to be impacted by prepayments, defaults, and other cash flow events.
The FASB claimed that the new ASU would “expand the current single-layer model to allow multiple-layer hedges” of a single closed portfolio.
Moreover, the ASU would also clarify eligible hedging instruments in a single layer strategy, provide additional guidance on the accounting for fair value hedge basis adjustments, and indicate how these adjustments should be considered when determining credit losses for closed portfolio assets.