The Financial Accounting Standards Board has dusted off its notes on hedge accounting and determined it will move forward looking for ways to improve the existing model while also making it more consistent with international rules where possible.

In a recent board meeting, FASB took a fresh look at its hedge accounting project, which has been largely dormant since 2011. At that time, FASB was working closely with the International Accounting Standards Board in an attempt to converge U.S. and international accounting rules, but the two boards issued separate proposals in 2010 that differed from one another. That prompted FASB to issue an invitation to comment in 2011 asking U.S. constituents which proposal they liked better as a starting point for revisions to U.S. rules, after which FASB largely mothballed the project.

FASB staff brought the board back up to speed on feedback the board received and then filed on its 2011 invitation to comment, where letters generally implored FASB and IASB to work together on a converged solution to hedge accounting. Letter writers said they supported a principles-based approach to hedge accounting that would align the accounting more closely with an entity’s risk management strategies. They also called for an expansion of the risks that would be eligible for hedge accounting and the items that would be eligible to be designated as hedging instruments.

After reviewing feedback and considering a path forward, FASB determined it will not take a blank-sheet-of-paper approach to revising hedge accounting, but will begin with the model that already exists in Accounting Standards Codification Topic 815 on derivatives and hedging. The board will look at possible changes to a number of areas, including hedge effectiveness requirements, whether the short-cut and critical terms match methods should be eliminated, voluntary dedesignations of hedging relationships, reporting of ineffectiveness for cash flow underhedges, hedging components in nonfinancial items, benchmark interest rates, and disclosures.

Board members also asked the staff to take a fresh look at issues such as presentation, hedge documentation, clearing houses, and opportunities to converge GAAP with IFRS as it exists now. While FASB took some time off of hedge accounting, the IASB did not, issuing IFRS 9 as a final comprehensive standard on financial instruments, impairment, and hedging. IASB finalized its hedging requirements in 2013. The entire package takes effect Jan. 1, 2018. FASB Chairman Russ Golden pointed out that while one of FASB’s goals will be to reduce differences between GAAP, the end result will not be fully convergence because FASB is beginning with existing GAAP as its starting point.

The board debated whether to pursue targeted achievements to hedge accounting to address long-known practice issues or a more comprehensive overhaul of hedge accounting. FASB member Tom Linsmeier was looking for something broader. “If we step back and think about holistically what a hedging accounting model tries to achieve, I don’t think we achieve it very well in our existing model because of presentation issues,” he said. “I hope we think about presentation or disclosure very significantly.” FASB member Jim Kroeker said he worried a broader project would take as long as five to 10 years to complete, leaving current practice issues unaddressed for a much longer time line. 

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