FASB to Start Project on Simplifying, Easing Derivatives and Hedge Accounting

By Steve Burkholder

Nov. 5— U.S. accounting rulemakers will consider easing restrictions on manufacturing companies being able to receive beneficial hedge accounting treatment stemming from use of derivatives, to cut the risk of changes in commodity prices that go into the making of a product.

In the language of the Financial Accounting Standards Board, which voted Nov. 5 to activate its multi-faceted project on hedge accounting, the board will include in that effort what it calls “component hedging.”

Business-Friendly Accounting Treatment

Companies can avail themselves of business-friendly hedge accounting treatment for commodity hedges, if certain requirements are met. However, they face limits on, for example, being able to use that accounting approach under Accounting Standards Codification 815 for forecasted sales or purchases of commodities used as ingredients or other components “of a larger nonfinancial item,” as a FASB staff accountant told the board.

Companies can avail themselves of business-friendly hedge accounting treatment for commodity hedges, if certain requirements are met.

The FASB staff accountant cited the example of hedging the price of rubber in a tire.

Last year in a brief interview with Bloomberg BNA, FASB Chairman Russell Golden called current GAAP on the topic “overly restrictive.”

The situation with regard to U.S. generally accepted accounting principles attracted the attention of Financial Executives International, particularly as the International Accounting Standards Board considered and eventually issued new standards that are less restrictive in the use of hedge accounting for commodities that are components of a product.

Under IFRS 9, hedging provisions issued by IASB this year, specific risk components can be designated as the hedged item if they are “separately identifiable and reliably measurable.”

A company's ability to employ hedge accounting in commodity hedges can have a major impact on its financial reporting.

The component hedging issues that FASB plans to tackle are those found in transactions involving nonfinancial items and in financial instruments. However, the board plans to focus more on nonfinancial items, such as commodity hedges, as signaled by a staff accountant Nov. 5.

FASB Decides on Basic Scope

At its weekly meeting Nov. 5, FASB tentatively decided that the following hedge accounting topics also would be in the scope of the planned work, as described by the board's staff in a handout:

•  hedge effectiveness requirements;

•  potential elimination of the “shortcut” and “critical terms match” methods used in hedge accounting under ASC 815;

•  voluntary designation of hedging relationships;

•  recording of ineffectiveness for cash flow “underhedges”;

•  benchmark interest rates, such as LIBOR;

•  simplifying hedge documentation requirements; and

•  presentation and disclosure of hedging instruments, hedge items, and hedging ineffectiveness. 

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

To contact the editor responsible for this story:

A FASB staff summary of the hedge accounting issues discussed Nov. 5 is available at www.fasb.org, under “Meetings” and “Meeting Handouts.” Information on FASB's research project on hedge accounting is posted at http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FProjectUpdatePage&cid=1176159271017t.