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.

ASU 2017-12 is now effective for all entities; see Section 7.2 for a summary of key changes to the hedge accounting recognition and presentation requirements in ASC 815.

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. ASU 2019-04 is now effective for all entities.

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. ASU 2018-16 is now effective for all entities.

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 the ASU).

ASU 2017-12 added the “last-of-layer” method to ASC 815 (see Section 3.2.1.4), which enables 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 expands the current single-layer model to allow multiple-layer hedges of a single closed portfolio of financial assets under this method. The last-of-layer method is renamed the “portfolio layer method” to reflect this change. See Chapter 9 for further discussion of ASU 2022-01.

Changing Lanes

In addition to the ASUs discussed above, in November 2019, the FASB issued a proposed ASU of Codification improvements to hedge accounting. The proposed ASU considered the following potential improvements to hedge accounting guidance in ASC 815:

Change in hedged risk in a cash flow hedge.
Designation of contractually specified components in cash flow hedges of nonfinancial forecasted transactions.
Use of the term prepayable under the shortcut method.
Use of foreign-currency-denominated debt instrument as hedging instrument and hedged item.

In June 2021, the Board issued an invitation to comment to request feedback on how to refine its broader standard-setting agenda. On the basis of feedback received, the FASB decided to include the following issues in the project scope:

Application of shared risk assessment in cash flow hedges of loan portfolios.
Use of net written options as hedging instruments.

On September 25, 2024, the FASB issued a proposed ASU that would make targeted improvements related to many of these topics. As of the date of this publication, the Board aims to issue a final ASU in early 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.