1.2 History of Hedge Accounting Guidance

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1.2 History of Hedge Accounting Guidance

Before the FASB’s issuance of Statement 133 in June 1998, the existing guidance on derivatives and hedging activities (provided first by the AICPA and later by the FASB) applied to specific transactions or groups of transactions. FASB Statement 133 established comprehensive accounting and reporting requirements for derivatives (as defined in the standard) and qualifying hedging activities. Derivatives within the scope of FASB Statement 133 were required to be (1) recognized on the balance sheet as assets or liabilities and (2) measured at fair value in each reporting period. FASB Statement 133 indicated that the accounting for changes in a derivative’s fair value would depend on whether that derivative was designated and qualified as the hedging instrument in a hedging relationship that satisfied the criteria to qualify for hedge accounting and the accounting and reporting requirements for such accounting.

Concurrently with the issuance of Statement 133, the FASB established the Derivatives Implementation Group (DIG) to help it develop guidance on matters associated with an entity’s implementation of FASB Statement 133. The DIG did not vote on issues or reach consensuses; rather, the FASB chairman identified resolutions on the basis of the discussions of each issue. The FASB staff then documented tentative conclusions and made them available for public comment. Once those conclusions were formally cleared by the Board, they became part of a FASB staff implementation guide composed of DIG Issues. The DIG met bimonthly from mid-1998 through March 2001.

In addition to addressing DIG Issues, the FASB issued several amendments to Statement 133, and the EITF deliberated some issues associated with derivatives and hedging. When the FASB Accounting Standards Codification (the “Codification”) was released in 2009, ASC 815 became the primary home of the collective guidance.

In August 2017, the FASB issued ASU 2017-12, which amended the hedge accounting recognition and presentation requirements in ASC 815. The Board’s objectives in issuing the ASU were to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of hedge accounting and simplify its application by preparers.

Industry groups, accounting firms, standard setters, and regulators continue to discuss issues raised related to the implementation of ASU 2017-12. On the basis of several meetings in 2018 and 2019 regarding these implementation issues, the FASB posted certain interpretations on its Web site. In addition, in April 2019, the FASB issued ASU 2019-04, which included amendments to ASC 815 related to hedge accounting.

As discussed further in Chapter 8, the FASB also established a reference rate reform project to address concerns about accounting consequences that could result from the global markets’ anticipated transition away from LIBOR and other interbank offered rates to alternative reference rates. The first phase of the reference rate reform project resulted in the October 2018 issuance of ASU 2018-16, which amended ASC 815 to add the “Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate” as a fifth U.S. benchmark interest rate.

Further, in March 2020 the FASB issued ASU 2020-04, which added a new Codification topic, ASC 848, to provide temporary, optional expedients related to contract modification accounting and hedge accounting. In December 2022, the FASB issued ASU 2022-06 to defer the sunset date of ASC 848 until December 31, 2024. ASU 2022-06 became effective upon issuance (see Section 8.2 for more information about ASU 2020-04).

ASU 2017-12 added the “last-of-layer” method to ASC 815, which enabled an entity to apply fair value hedging to closed portfolios of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. In March 2022, the FASB issued ASU 2022-01, which expanded the single-layer model to allow multiple-layer hedges of a single closed portfolio of financial assets under this method. The last-of-layer method was renamed the “portfolio layer method” to reflect this change. ASU 2022-01 is now effective for all entities. See Section 3.2.1.4 for further discussion of the portfolio layer method.

Changing Lanes

In addition to the ASUs discussed above, in November 2019, the FASB issued a proposed ASU of Codification improvements to hedge accounting. Stakeholder feedback indicated that the amendments in the 2019 proposed ASU would not sufficiently resolve certain issues and that additional clarity was needed. Further, in response to the FASB’s June 2021invitation to comment, stakeholders identified multiple areas of the hedge accounting guidance for which additional updates were needed to address the effects of reference rate reform on the hedge accounting framework. On the basis of stakeholder feedback received, the Board amended the scope of its hedge accounting project.

In September 2024, the FASB issued a proposed ASU that would make targeted improvements to address concerns raised by stakeholders. The proposed ASU considers potential improvements to hedge accounting guidance in ASC 815 for five issues, which are reproduced below:

Issue 1: Similar Risk Assessment for Cash Flow Hedges.
Issue 2: Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments.
Issue 3: Cash Flow Hedges of Nonfinancial Forecasted Transactions.
Issue 4: Net Written Options as Hedging Instruments.
Issue 5: Foreign-Currency-Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge).

During its March 26, 2025, meeting, the FASB redeliberated and discussed feedback received on the 2024 proposed ASU. The Board affirmed the proposed amendments in Issues 1, 3, and 5, while reaching tentative decisions to amend the proposed amendments in Issues 2 and 4 (see the Tentative Board Decisions). As of the date of this publication, the Board aims to issue a final ASU in late 2025.

See Appendix A for a comparison of the hedge accounting guidance in U.S. GAAP with that in IFRS Accounting Standards.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.