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Many companies eagerly await new hedge accounting rules touted as better showing how enterprises actually manage risk and which simplify a complex area of financial reporting, Sue Cosper, technical director at the Financial Accounting Standards Board, told Bloomberg BNA.
“This is one of the standards that companies are clamoring to adopt,” Cosper said in a videotaped interview. FASB hopes to issue the standard in late August.
Companies want to start reporting under the board’s new, less difficult recipes for derivatives and hedge accounting on the day that the board issues the accounting standards update, she said July 17.
FASB set a January 2019 effective date for the hedging ASU for public companies, but allows early adoption on issuance.
Cosper emphasized a “big change” to existing derivatives and hedge accounting the rules: allowing for “component hedges.” In a component hedge, companies designate a derivative to guard against changes in the cost of ingredients or components of products, to meet hedge accounting criteria.
She cited the example of a box-maker being able to hedge the corrugated material that goes into the finished container. Other rulemakers have used the example of a tire-maker hedging against changes in the price of rubber.
The board saw a need to make “targeted improvements” in the slimmed-down hedge accounting rules, which are favored by companies and investors, Cosper told Bloomberg BNA, echoing recent comments by FASB Chairman Russell Golden.
FASB undertook the narrow-scope standard-setting after hearing from companies that they weren’t able to reflect the economics of hedging in their financial statements, Cosper said.
Onerous documentation and other requirements discouraged companies from trying to qualify for the business-friendly, expense-deferring form of reporting known as hedge accounting—even though they had set in motion hedging strategies, taking on derivatives to cut risk of loss in value of assets.
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