FASB Makes Headway on Hedge Accounting

By Steve Burkholder

Oct. 7 — The Financial Accounting Standards Board plans to move closer to international financial reporting standards in some of the U.S. board's rules on certain hedging transactions marked by use of derivatives.

The transactions at issue, which spurred a tentative decision to adopt a prescription similar to that in IFRS 9, on financial instruments, focuses on "sub-benchmark hedging of fixed-rate financial instruments in fair value hedges." IFRS are issued by the International Accounting Standards Board.

Sub-LIBOR Hedge

The title of that topic—in shorthand, a "sub-LIBOR"  hedge—hints at the level of complexity of hedge accounting issues that FASB considered at its Oct. 7 meeting. LIBOR stands for the London interbank offered rate, a common benchmark in banking.

Despite the complicated nature of the transactions under scrutiny, the meeting yielded general headway on the U.S. board's effort to streamline and improve hedge accounting rules for a variety of scenarios.

FASB plans to issue a draft accounting standards update in the first quarter of 2016. It hopes to publish final rules later in the new year. The various questions weighed by FASB Oct. 7 are labeled "sweep issues", for those that arose during staff drafting of the planned proposal.

Aligning With IFRS

The issue on which FASB tentatively aligns with IFRS relates to which cash flows should be used in gauging changes in the fair value of the hedged item stemming from interest-rate risk under a particular set of circumstances. As described by FASB's staff in a board meeting handout, that set of circumstances is "when the stated fixed interest rate of [the] hedged asset or liability is less than the benchmark rate (for example, 4 percent when the benchmark is 5 percent)."

The wider backdrop for the question is marked by use of total coupon or benchmark coupon cash flows.

The U.S. board considered what to do when figuring the gains or losses on the hedged items attributable to changes in the benchmark interest rate under the "long-haul method" in U.S. generally accepted accounting principles on derivatives and hedging.. Such a method involves discerning hedge effectiveness.

In that particular scenario, the benchmark interest rate part of the total contractual coupon could be used, "provided the benchmark is equal to or less than the effective rate on the debt instrument", according to FASB's staff.

FASB tackled and managed to make headway Oct. 7 on other hedge accounting issues as, if not more, complicated than the above. Those topics included net investment hedges, excluded components in cash flow hedges and features that may limit an entity's exposure to a contractually specified interest rate or component.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Ali Sartipzadeh in Washington at asartipzadeh@bna.com