For a preview of what hedge accounting rules could look like in the United States, have a look at the draft proposal issued by the International Accounting Standards Board for a new standard on hedge accounting requirements that would be added to IFRS 9, Financial Instruments.

IASB published the proposal as part of its three-part effort to overhaul all accounting under International Financial Reporting Standards for financial instruments. The board is working separately on how to improve classification and measurement of financial assets and financial liabilities, and how to improve the requirements around showing impairments, or losses in value, for financial instruments.

The Financial Accounting Standards Board is on a similar journey, but it is working on a single new standard for financial instruments that would cover all of those issues, including hedge accounting. FASB issued a proposal in May 2010 that it continues to revise for eventual re-exposure. As part of it's redeliberation on feedback to that proposal, FASB issued a discussion document in February 2011 that asked for views on how the IASB approach to hedge accounting would work under U.S. Generally Accepted Accounting Principles.

The IASB's most recently published draft would ease the current requirements for assessing the effectiveness of a hedge, making it easier for a transaction to qualify for hedge accounting. The proposal would lift some of the strict, prescriptive requirements for hedge accounting, establishing a more principles-based approach that would give preparers room to make judgments. The draft also addresses some inconsistencies and weaknesses in the hedge accounting model under international rules, according to a PwC summary of the proposal. U.S. GAAP has long been criticized for having similar, highly prescriptive requirements that are difficulty to apply, making hedge accounting among the most complicated areas of U.S. rules.

FASB and IASB began their long-term effort to overhaul accounting for financial instruments in 2005, then faced significant pressure from the Group of Twenty Nations to step up the pace when the financial crisis of 2008 and 2009 demonstrated flaws in how the rules were applied at financial institutions. As the two boards have worked to converge U.S. and international accounting standards, the quest to converge rules for financial instruments has proved most problematic.

After ironing out some significant differences in approach, the two boards appeared to be headed for common standards when FASB broke ranks earlier this year on how to address U.S. concerns about the proper way to reflect expected credit losses. FASB recently discussed including a nonaccrual concept in its financial instrument model. The board reached some tentative decisions on when an entity would stop accruing interest on a given financial instrument based on probability of collection and how to apply its credit loss model to debt instruments and financial assets measured at fair value with changes reflected in other comprehensive income.

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