What to Know About the New Hedge Accounting Standard
The vice chairman of the Financial Accounting Standards Board discusses the standard that will be released this month and its impact on midsize companies.
The Financial Accounting Standards Board plans to release its new standard related to the rules for hedge accounting later this month.
MMG spoke recently with James Kroeker, vice chairman of FASB, to learn more about the forthcoming standard and what it means for the middle market.
Q. When will the FASB release its final hedging standard, and when will it go into effect for companies?
James Kroeker: The FASB expects to issue its final standard on hedging by the end of August.
For public companies, the new standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
For private companies, the new standard is effective for fiscal years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020). Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.
Q. What types of issues does the amended standard seek to address?
JK: While developing the standard, the FASB conducted outreach with stakeholders who expressed concern that current hedge accounting requirements sometimes limit a company’s ability to effectively recognize the economic results of its hedging strategies in its financial statements.
Based on that feedback, the FASB sought to improve the hedge accounting model to facilitate financial reporting that more closely reflects the economic impacts of a company’s risk-management activities.
The FASB also sought to address the concerns of financial statement users who said they found it difficult to understand and interpret the effect of hedge accounting on a company’s reported results. The new standard will improve how hedging results are reported, making it easier for investors and other users to better understand a company’s risk exposures and how hedging strategies are used to manage those exposures.
“Companies of all sizes have commented that the proposals will better reflect the economics of their risk-management activities.”
Q. What are the major changes that the new rules will introduce?
JK: In developing the new standard, the FASB decided that the types of items and transactions currently eligible for hedge accounting would continue to be eligible under the amendments in the upcoming standard. The issues that the board considered in this project are expected to expand the number and types of transactions that would qualify for hedge accounting.
Some of the more significant changes include:
- Expanding the ability to hedge commodity risks
- Better reflecting the economics of interest rate hedges
- Allowing more qualitative assessments of the hedging relationship
- Presenting hedge accounting results in a more understandable manner so investors and other users of financial statements can more easily understand the total impact of hedge accounting on the financial statement
- Giving companies more time to complete hedge documentation
Q. How will the rule changes impact midsize private companies?
JK: The FASB has received overwhelmingly positive feedback on the proposed changes to the hedge accounting model from midsize companies. In fact, companies of all sizes have commented that the proposals will better reflect the economics of their risk-management activities. Many have expressed interest in adopting the final standard early.
Private companies of all sizes will have more time to meet the documentation requirements, given the fact that they have fewer financial statement reporting requirements and more limited resources than large public companies.
Q. How will they impact investors?
JK: During the development of the standard, investors and other financial statement users expressed a desire for improved disclosures that would help them better understand a company’s risk exposures and risk-management activities. Consequently, the new standard will require enhanced disclosures on hedging activities and the effect that those activities have on the financial statements. This will allow investors to see more clearly the effects of hedge accounting on individual income statement line items.
Q. Are there particular industries that will be affected most by the rules change?
JK: Hedge accounting is elective. Therefore, any company that elects to apply hedge accounting will likely benefit from the changes. The amendments in this accounting standards update will help both financial institutions and nonfinancial companies better reflect their risk management activities in their financial statements.
More information about the standard is available on the FASB’s website.
James L. Kroeker was appointed a member and vice chairman of the Financial Accounting Standards Board on September 1, 2013. He assists the FASB chairman in representing the board to external stakeholders and in conducting its internal operations, in addition to serving as a voting member of the board. Kroeker joined the FASB from Deloitte, where he served as the deputy managing partner for professional practice.
