7.4 Transition Provisions

ASC 815-20

65-3 The following represents the transition and effective date information related to Accounting Standards Updates No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, No. 2019-04, Codification Improvements to Topic 326, Financial Instruments — Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and No. 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates: . . .

d. For cash flow hedges and net investment hedges existing (that is, the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) as of the date of adoption, an entity shall apply the pending content that links to this paragraph related to the elimination of the separate measurement of ineffectiveness by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date. . . .

Entities adopt the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships2 as of the adoption date. Under this approach, entities with cash flow or net investment hedges make (1) a cumulative-effect adjustment to AOCI so that the adjusted amount represents the cumulative change in the hedging instruments’ fair value since hedge inception (less any amounts that should have been recognized in earnings under the new accounting model) and (2) a corresponding adjustment to opening retained earnings as of the most recent period presented on the date of adoption.

7.4.1 Transition Elections

ASC 815-20

e. An entity may elect any of the following items upon adoption of the pending content that links to this paragraph:

For a fair value hedge of interest rate risk existing as of the date of adoption, an entity may modify the measurement methodology for a hedged item in accordance with either paragraph 815-20-25-6B or paragraph 815-25-35-13 without dedesignation of the hedging relationship. The cumulative basis adjustment carried forward shall be adjusted to an amount that reflects what the cumulative basis adjustment would have been at the initial application date had the modified measurement methodology been used in all past periods in which the hedging relationship was outstanding. When making this election, the benchmark rate component of the contractual coupon cash flows shall be determined as of the hedging relationship’s original inception date. The cumulative effect of applying this election shall be recognized as an adjustment to the basis adjustment of the hedged item recognized on the balance sheet with a corresponding adjustment to the opening balance of retained earnings as of the initial application date.
For the fair value hedges of interest rate risk for which an entity modifies the measurement methodology for the hedged item based on the benchmark rate component of the contractual coupon cash flows in accordance with (1) above, an entity may elect to rebalance the hedging relationship through any of the following approaches, including any combination of those approaches:
1. Increasing the designated notional amount of the hedging instrument
2. Decreasing the designated notional amount of the hedging instrument
3. Increasing the designated proportion of the hedged item
4. Decreasing the designated proportion of the hedged item.
An entity may not add a new hedging instrument or hedged item to an existing hedging relationship. If an entity applies the guidance in (iii) or (iv) above, the cumulative effect of changing the designated proportion of the hedged item shall be recognized as an adjustment to the basis adjustment of the hedged item recognized on the balance sheet with a corresponding adjustment to the opening balance of retained earnings as of the initial application date.
For fair value hedges existing as of the date of adoption in which foreign exchange risk is the hedged risk or one of the hedged risks and a currency swap is the hedging instrument, an entity may, without dedesignation, modify its hedge documentation to exclude the cross-currency basis spread component of the currency swap from the assessment of hedge effectiveness and recognize the excluded component through an amortization approach. The cumulative effect of applying this election shall be recognized as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date.
For hedges existing as of the date of adoption that exclude a portion of the hedging instrument from the assessment of effectiveness, an entity may modify the recognition model for the excluded component from a mark-to-market approach to an amortization approach without dedesignation of the hedging relationship. The cumulative effect of applying this election shall be recognized as an adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date.
An entity may modify documentation without dedesignating an existing hedging relationship to specify the following:
1. For hedging relationships that currently use a quantitative method to assess effectiveness, that subsequent prospective and retrospective effectiveness assessments shall be performed qualitatively in accordance with paragraph 815-20-25-3(b)(2)(iv)(03)
2. For hedging relationships that currently use the shortcut method to assess effectiveness, the quantitative method that would be used to perform assessments of effectiveness in accordance with paragraph 815-20-25-117A if the entity determines at a later date that use of the shortcut method was not or no longer is appropriate
3. For cash flow hedging relationships in which an entity currently uses a quantitative method to assess effectiveness, that the critical terms of the hedging instrument and the hedged item match if the criteria in paragraphs 815-20-25-84 through 25-85 or paragraphs 815-20-25-129 through 25-129A are met and that subsequent prospective and retrospective effectiveness assessments shall be performed in accordance with paragraphs 815-20-35-9 through 35-12 or in accordance with paragraphs 815-20-25-126 through 25-129A and paragraphs 815-30-35-33 through 35-34.
For cash flow hedges existing as of the date of adoption in which the hedged risk is designated as the variability in total cash flows that meet the requirements to designate as the hedged risk the variability in cash flows attributable to changes in a contractually specified component or a contractually specified interest rate, an entity may:
1. Modify the hedging relationship, without dedesignation, to specify the hedged risk is the variability in the contractually specified component or contractually specified interest rate
2. Create the terms of the instrument used to estimate changes in value of the hedged risk (either under the hypothetical derivative method or another acceptable method in Subtopic 815-30) in the assessment of effectiveness on the basis of market data as of the inception of the hedging relationship
3. Consider any ineffectiveness previously recognized on the hedging relationship as part of the transition adjustment in accordance with (d) above.
An entity may reclassify a debt security from held-to-maturity to available-for-sale if the debt security is eligible to be hedged under the last-of-layer method in accordance with paragraph 815-20- 25-12A. Any unrealized gain or loss at the date of the transfer shall be recorded in accumulated other comprehensive income in accordance with paragraph 320-10-35-10(c). That reclassification, in and of itself, would not result in any of the following:
1. Call into question the entity’s assertion at the most recent reporting date that it had the intent and ability to hold to maturity those debt securities that continue to be classified as held-to-maturity
2. Require the entity to designate the reclassified security in a hedging relationship under the last-of-layer method
3. Restrict the entity from selling the reclassified security.

f. For private companies that are not financial institutions as described in paragraph 942-320-50-1 and not-for-profit entities (except for not-for-profit entities that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market), the elections in (e) above shall be determined before the next interim (if applicable) or annual financial statements are available to be issued.

g. For all other entities, the elections in (e) above shall be determined before the first quarterly effectiveness assessment date after the date of adoption.

h. For fair value hedges existing as of the date of adoption in which the hedged item is a tax-exempt financial instrument, the hedged risk may be modified to interest rate risk related to the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The modification shall be considered a dedesignation and immediate redesignation of the hedging relationship. In this situation, the cumulative basis adjustment of the hedged item from the dedesignated hedging relationship shall be amortized to earnings on a level-yield basis over a period of time based on the applicable requirements in other Topics. . . .

ASU 2017-12 provides the following transition elections, which may be applied individually or in any combination:

Transition elections for all hedges that exist on the date of adoption:
- An entity may modify the recognition model for excluded components from a mark-to-market approach to the amortization approach without having to dedesignate the hedging relationship by making (1) a cumulative-effect adjustment to AOCI and (2) a corresponding adjustment to opening retained earnings as of the initial application date.
- An entity may modify hedge documentation without dedesignating those hedges to specify the following:
  - That subsequent prospective and retrospective hedge effectiveness assessments will be performed qualitatively.
  - For hedging relationships for which the entity uses the shortcut method, the quantitative method that the entity will use to perform assessments of effectiveness if it determines at a later date that use of the shortcut method was not or no longer is appropriate.
Transition elections for fair value hedges that exist on the date of adoption:
- For fair value hedges of interest rate risk, an entity may elect to apply the revised measurement methods related to (1) using the benchmark rate component of contractual coupon cash flows to measure changes in the hedged item’s fair value that are attributable to changes in the benchmark interest rate or (2) considering only changes in benchmark interest rates in calculating prepayable financial instruments’ change in fair value that is attributable to interest rate risk. When making this election, which does not require dedesignation of the hedging relationship, an entity should:
  - Adjust the amount of any existing cumulative basis adjustment to what it would have been as of the adoption date had the entity applied the revised measurement method throughout the life of the hedging relationship and make a corresponding adjustment to the opening balance of retained earnings as of the initial application date.
  - Determine the benchmark rate component of the contractual coupon cash flows as of the hedging relationship’s original inception date.
- An entity that elects to revise its measurement method to use the benchmark rate component of the contractual coupon cash flows also may elect to rebalance the hedging relationship by increasing or decreasing the designated notional amount of the hedging instrument or designated proportion of the hedged item. An entity may not add a new hedging instrument or hedged item to an existing relationship without dedesignating the existing relationship and redesignating a new hedging relationship. If an entity changes the designated proportion of the hedged item, the cumulative effect of changing the designated portion of the hedged item should be recognized as the related basis adjustment to the opening balance of retained earnings as of the initial application date.
- An entity that uses cross-currency swaps to fair value hedge foreign exchange risk may, without dedesignating the hedging relationship, modify its hedge documentation to exclude the cross-currency basis spread component of the currency swap from its assessment of hedge effectiveness and recognize that excluded component through an amortization approach. The entity should adjust AOCI for the cumulative effect of applying this election as if it has been applied since the inception of the hedging relationship and make a corresponding adjustment to opening retained earnings as of the initial application date.
- For existing fair value hedges in which the hedged item is a tax-exempt financial instrument, the hedged risk may be modified to changes in fair value attributable to the SIFMA Municipal Swap Rate. This modification would be considered a dedesignation and immediate redesignation. The cumulative basis adjustment from the dedesignated hedging relationship should be amortized to earnings on a level-yield basis over a period based on the applicable GAAP for that financial instrument.
Transition elections for cash flow hedges that exist on the date of adoption:
- For cash flow hedging relationships in which an entity previously used a quantitative method to assess effectiveness, the entity may apply the critical-terms-match method (see Section 2.5.2.2.2) prospectively without having to dedesignate the hedge.
- For cash flow hedges (1) in which the entity previously designated as the hedged risk the variability in total cash flows and (2) that now qualify for designation of the variability in cash flows attributable to changes in a contractually specified component or interest rate as the hedged risk, the entity may:
  - Modify the hedging relationship documentation to designate the variability in the contractually specified component or contractually specified interest rate as the hedged risk, without having to dedesignate the hedge.
  - Establish the terms of the instrument that it uses to estimate changes in the value of the hedged risk (under either the hypothetical derivative method or another acceptable method) in its hedge effectiveness assessment on the basis of market data as of the inception of the hedging relationship.
  - Consider any hedging relationship ineffectiveness previously recognized as part of the transition adjustment for cash flow hedges.
Additional transition election:
- An entity may reclassify a debt security from HTM to AFS if the debt security is eligible to be hedged under the last-of-layer method. Any unrealized gain or loss on the transfer date should be recorded in AOCI in accordance with ASC 320-10-35-10(c).
- Any reclassification, in and of itself, would not:
  - Call into question the entity’s assertion on the most recent reporting date that it had the intent and ability to hold to maturity those debt securities that continue to be classified as HTM.
  - Require the entity to designate the reclassified security in a last-of-layer hedging relationship.
  - Restrict the entity from selling the reclassified security.

Private companies that are not financial institutions as well as not-for-profit entities (except those that have issued, or are a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an OTC market) must make the transition elections before their next set of interim (if applicable) or annual financial statements is available to be issued. All other entities must make the elections before the first effectiveness testing date after adoption.

7.4.1.1 Exception to Similar Methods of Assessment for Similar Hedges

ASC 815-20

i. An entity is not required to apply the guidance in paragraph 815-20-25-81 when comparing hedging relationships executed before and after the date of adoption of the pending content that links to this paragraph for any of the following:

Hedging relationships executed before the date of adoption assessed under the shortcut method for which hedge documentation was not amended as permitted by (e)(5)(ii) above, and hedging relationships executed after the date of adoption assessed under the shortcut method in accordance with paragraphs 815-20-25-117A through 25-117D
Hedging relationships executed before the date of adoption for which the hedged risk was not amended to a contractually specified component or a contractually specified interest rate as permitted by (e)(6) above, and hedging relationships executed after the date of adoption for which the hedged risk is the variability in cash flows attributable to changes in a contractually specified component or a contractually specified interest rate
Hedging relationships executed before the date of adoption for which the recognition of excluded components was not amended to an amortization approach as permitted by (e)(4) above, and hedging relationships executed after the date of adoption for which an amortization approach is elected in accordance with paragraph 815-20-25-83A. . . .

With respect to the transition elections to (1) amend shortcut method hedge documentation, (2) change the designated hedged risk to the variability in cash flows attributable to changes in a contractually specified component or a contractually specified interest rate, and (3) apply the amortization approach to recognized excluded components, an entity is not required to apply the guidance in ASC 815-20-25-81, which states, in part, that “[o]rdinarily, an entity shall assess effectiveness for similar hedges in a similar manner, including whether a component of the gain or loss on a derivative instrument is excluded in assessing effectiveness for similar hedges.” Therefore, an entity may treat postadoption hedging relationships differently than it treats similar preadoption hedging relationships.

7.4.2 Presentation and Disclosures

ASC 815-20

j. On a prospective basis only for existing hedging relationships on the date of adoption (in all interim periods and fiscal years ending after the date of adoption), an entity shall:

Present the entire change in the fair value of the hedging instrument in the same income statement line item as the earnings effect of the hedged item when the hedged item affects earnings (with the exception of amounts excluded from the assessment of hedge effectiveness in a net investment hedge) in accordance with paragraphs 815-20-45-1A and 815-20-45-1C
Disclose the items in the pending content that links to this paragraph in Subtopic 815-10.

k. An entity shall provide the following disclosures within Topic 250 on accounting changes and error corrections:

The nature of and reason for the change in accounting principle
The cumulative effect of the change on the opening balance of each affected component of equity ornet assets in the statement of financial position as of the date of adoption
The disclosures in (1) through (2) above in each interim and annual financial statement period in thefiscal year of adoption.

In each annual and interim reporting period in the fiscal year of adoption, entities will also be required to provide certain disclosures required by ASC 250 about (1) the nature and reason for the change in accounting principle and (2) the cumulative effect of the change on the opening balance of affected components of equity or net assets as of the date of adoption.

In all interim periods and fiscal years ending after the date of adoption, entities should prospectively (1) present the entire change in the fair value of a hedging instrument in the same income statement line item(s) as the earnings effect of the hedged item when that hedged item affects earnings (other than amounts excluded from the assessment of net investment hedge effectiveness, for which ASU 2017-12 does not prescribe presentation) and (2) provide the amended disclosures required by the new guidance (see Section 6.6).

Footnotes

This refers to hedging relationships in which “the hedging instrument has not expired, been sold, terminated, or exercised” and that have not been dedesignated by the entity as of the date of adoption.

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