9.4 Accounting for Hedge Basis Adjustments Under the Portfolio Layer Method

As it would for any other fair value hedge, an entity should adjust the basis of the hedged item for the change in fair value that is attributable to changes in the hedged risk (i.e., interest rate risk) as of each reporting date. However, the hedged item (i.e., the hedged layer) in a portfolio layer method hedge is related to multiple assets within a closed portfolio, but it is not necessarily related to all of the assets within that portfolio. Accordingly, ASU 2022-01 clarifies that an entity would adjust the basis at the portfolio level and should not allocate it to individual assets within the portfolio. There is no guidance on such treatment under current requirements.

Further, the ASU does not change an entity’s current requirement to allocate the portfolio-level basis adjustment to the individual assets within a closed portfolio upon a dedesignation of a hedging relationship. The entity must, however, (1) recognize the reversal of all basis adjustments associated with a breach in interest income and (2) disclose the specific amount and cause of the breach.

ASU 2022-01 also provides guidance on the relationship between the portfolio layer method requirements and other areas of GAAP. It addresses questions raised by stakeholders about the interaction between the last-of-layer method guidance and ASC 326 or other impairment guidance (for entities that have not yet adopted ASC 326) by explicitly prohibiting entities from considering basis adjustments related to existing portfolio layer method hedges when measuring credit losses on the assets included in the closed portfolio.