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At its June 29, 2015 board meeting, the Financial Accounting Standards Board (the “FASB”) moved towards simplifying hedge accounting and making it easier for certain types of interest rate and commodity hedges to qualify for hedge accounting treatment. This article summarizes the tentative decisions with regard to amending ASC 815, Derivatives and Hedging and their likely impact.
When companies evaluate their financial risks they can separate these risks into current exposures on the balance sheet and future exposures that the enterprise is likely to face. Unlike balance sheet exposures, forecasted exposures are not known with certainty and hedging those exposures should take into account historical experience and future business expectations, forecast error and potential ineffective hedging results. This article will focus on achieving cash flow hedge accounting for forecasted exposures and best practice strategies to manage these financial risks while minimizing reported earnings volatility.
As a follow-up to our September, 2013 article "New Shortcut Method Proposed for Private Companies", the FASB on 11/25/13 endorsed by a vote of 6-1 the Private Company Council (PCC) Issue 13-03A that would allow a shortcut method of reporting for pay-fixed interest rate swaps that hedge variable rate borrowings.
On July 17, 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-10, Inclusion of Fed Funds Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes which is effective prospectively for new or re-designated hedging relationships entered into on or after 7/17/13. What does this mean for Corporate Hedgers and Hedging Relationships?
The FASB on 7/1/13 issued an Exposure Draft as a Proposed Accounting Standard Update (PASU); a proposal of the Private Company Council (PCC) PCC Issue 13-03 that would allow two versions of a shortcut method of reporting pay-fixed interest rate swaps that hedge variable rate borrowings. If you have or are contemplating entering into a pay-fixed interest rate swap and are a private company there may be some relief on the horizon from some of the current hedge accounting requirements.