9.7 Codification Guidance Added or Amended by ASU 2022-01
The Codification paragraphs below are added or amended by ASU
2022-01. See Section
9.6 for effective dates and transition.
ASC 815 — Glossary
Pending Content (Transition Guidance: ASC
815-20-65-6)
Hedged Layer
The hedged
item designated in a portfolio layer method
hedging relationship, representing a stated amount
or stated amounts of a closed portfolio of
financial assets or one or more beneficial
interests secured by a portfolio of financial
instruments that is not expected to be affected by
prepayments, defaults, or other factors affecting
the timing and amount of cash flows for the
designated hedge period.ASC 815-10
Pending Content (Transition Guidance: ASC
815-20-65-6)
50-4EEE For each line item
disclosed in accordance with paragraph
815-10-50-4EE(c) that includes hedging
relationships designated under the portfolio layer
method in accordance with paragraph 815-20-25-12A,
the following information shall be disclosed
separately:
- The amortized cost basis of the closed portfolio(s) of financial assets or the beneficial interest(s)
- The amount that represents the hedged item(s) (that is, the hedged layer or layers)
- The basis adjustment associated with the hedged item(s) (that is, the hedged layer or layers).
Example 20 (see paragraph 815-10-55-181)
illustrates these disclosures.
Basis Adjustment Considerations Under the
Portfolio Layer Method
50-5B For existing hedging
relationships designated under the portfolio layer
method, an entity shall not disclose the basis
adjustment on a more disaggregated basis than the
portfolio layer method closed portfolio to meet
the objectives of disclosure requirements in other
Topics unless that disaggregation is required in
accordance with paragraph 815-20-45-4. After an
entity allocates a basis adjustment in accordance
with paragraph 815-20-45-4 (if applicable), if
other Topics require the disclosure of the
amortized cost basis of assets included in the
closed portfolio on a basis that requires
disaggregating the assets included in the closed
portfolio, the entity shall exclude the portfolio
layer method basis adjustment from the amortized
cost basis of those assets. In that case, the
entity shall disclose the total amount of the
portfolio layer method basis adjustment excluded
from the amortized cost basis of the assets
included in the closed portfolio.
50-5C For
hedging relationships designated under the
portfolio layer method, if the outstanding amount
of the closed portfolio is less than the hedged
layer or layers in accordance with paragraph
815-25-40-8(b) (that is, a breach occurred), an
entity shall disclose:
- The amount of the hedge basis adjustment recognized in current-period interest income because of the breach
- The circumstances that led to the breach.
Example
20: Disclosure of Qualitative Information by
Underlying Risk and Hedge Basis Adjustment
Disclosures
55-181 This
Example illustrates the disclosure of objectives
and strategies for using derivative instruments by
underlying risk, including volume of activity (see
paragraph 815-10-50-1A(d)). It also illustrates
the hedge basis adjustment disclosures in
paragraphs 815-10-50-4EE through 50-4EEE.
The
Entity is exposed to certain risks relating to its
ongoing business operations. The primary risks
managed by using derivative instruments are
commodity price risk and interest rate risk.
Forward contracts on various commodities are
entered into to manage the price risk associated
with forecasted purchases of materials used in the
Entity’s manufacturing process. Interest rate
swaps are entered into to manage interest rate
risk associated with fixed-rate loans issued by
the Entity’s financing subsidiary.
FASB ASC
815-10 requires that an entity recognize all
derivative instruments as either assets or
liabilities at fair value in the statement of
financial position. In accordance with that
Subtopic, the Entity designates commodity forward
contracts as cash flow hedges of forecasted
purchases of commodities and interest rate swaps
as fair value hedges of fixed-rate
receivables.
Cash
flow hedges
For
derivative instruments that are designated and
qualify as a cash flow hedge, the gain or loss on
the derivative instrument is reported as a
component of other comprehensive income and
reclassified into earnings in the same period or
periods during which the hedged transaction
affects earnings and is presented in the same
income statement line item as the earnings effect
of the hedged item. Gains and losses on the
derivative instrument representing hedge
components excluded from the assessment of
effectiveness are recognized currently in earnings
and are presented in the same line of the income
statement expected for the hedged item.
As of
December 31, 20X2, the Entity had the following
outstanding commodity forward contracts that were
entered into to hedge forecasted purchases:
Fair
value hedges
For
derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on
the derivative instrument as well as the
offsetting loss or gain on the hedged item
attributable to the hedged risk are recognized in
current earnings. The Entity includes the gain or
loss on the hedged items (that is, fixed-rate
receivables) in the same line item — interest
income — as the offsetting loss or gain on the
related interest rate swaps.
As of
December 31, 20X2, and 20X1, the following amounts
were recorded on the balance sheet related to
cumulative basis adjustments for fair value
hedges.
As of
December 31, 20X2, and 20X1, the total notional
amount of the Entity’s pay-fixed/receive-variable
interest rate swaps was $79 and $82,
respectively.
ASC 815-20
Pending Content (Transition
Guidance: ASC 815-20-65-6)
25-3 Concurrent designation
and documentation of a hedge is critical; without
it, an entity could retroactively identify a
hedged item, a hedged transaction, or a method of
assessing effectiveness to achieve a desired
accounting result. To qualify for hedge
accounting, there shall be, at inception of the
hedge, formal documentation of all of the
following:
-
Subparagraph not used
-
Documentation requirement applicable to fair value hedges, cash flow hedges, and net investment hedges:
-
The hedging relationship
-
The entity’s risk management objective and strategy for undertaking the hedge, including identification of all of the following:
-
The hedging instrument.
-
The hedged item or transaction.
-
The nature of the risk being hedged.
-
The method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value (if a fair value hedge) or hedged transaction’s variability in cash flows (if a cash flow hedge) attributable to the hedged risk. There shall be a reasonable basis for how the entity plans to assess the hedging instrument’s effectiveness.01. An entity shall perform an initial prospective assessment of hedge effectiveness on a quantitative basis (using either a dollar-offset test or a statistical method such as regression analysis) unless one of the following applies:A. In a cash flow or fair value hedge, the entity applies the shortcut method in accordance with paragraphs 815-20-25-102 through 25-117.B. In a cash flow or fair value hedge, the entity determines that the critical terms of the hedging instrument and the hedged item match in accordance with paragraphs 815-20-25-84 through 25-85.C. In a cash flow hedge, the hedging instrument is an option, and the conditions in paragraphs 815-20-25-126 and 815-20-25-129 through 25-129A are met.D. In a cash flow hedge, a private company that is not a financial institution as described in paragraph 942-320-50-1 applies the simplified hedge accounting approach in paragraphs 815-20-25-133 through 25-138.E. In a cash flow hedge, the entity assesses hedge effectiveness under the change in variable cash flows method in accordance with paragraphs 815-30-35-16 through 35-24, and all of the conditions in paragraph 815-30-35-22 are met.F. In a cash flow hedge, the entity assesses hedge effectiveness under the hypothetical derivative method in accordance with paragraphs 815-30-35-25 through 35-29, and all of the critical terms of the hypothetical derivative and hedging instrument are the same.G. In a net investment hedge, the entity assesses hedge effectiveness using a method based on changes in spot exchange rates, and the conditions in paragraph 815-35-35-5 (for derivative instruments) or 815-35-35-12 (for nonderivative instruments) are met.H. In a net investment hedge, the entity assesses hedge effectiveness using a method based on changes in forward exchange rates, and the conditions in paragraph 815-35-35-17A are met.02. The initial prospective quantitative hedge effectiveness assessment using information applicable as of the date of hedge inception is considered to be performed concurrently at hedge inception if it is completed by the earliest of the following:A. The first quarterly hedge effectiveness assessment dateB. The date that financial statements that include the hedged transaction are available to be issuedC. The date that any criterion in Section 815-20-25 no longer is metD. The date of expiration, sale, termination, or exercise of the hedging instrumentE. The date of dedesignation of the hedging relationshipF. For a cash flow hedge of a forecasted transaction (in accordance with paragraph 815-20-25-13(b)), the date that the forecasted transaction occurs.03. An entity also shall document at hedge inception whether it elects to perform subsequent retrospective and prospective hedge effectiveness assessments on a qualitative basis and how it intends to carry out that qualitative assessment. See paragraphs 815-20-35-2A through 35-2F for additional guidance on qualitative assessments of effectiveness. In addition, the entity shall document which quantitative method it will use if facts and circumstances of the hedging relationship change and the entity must quantitatively assess hedge effectiveness in accordance with paragraph 815-20-35-2D. An entity must document that it will perform the same quantitative assessment method for both initial and subsequent prospective hedge effectiveness assessments. The guidance in paragraphs 815-20-55-55 through 55-56 applies if the entity wants to change its quantitative method of assessing effectiveness after the initial quantitative effectiveness assessment.04. An entity that applies the shortcut method in paragraphs 815-20-25-102 through 25-117 may elect to document at hedge inception a quantitative method to assess hedge effectiveness and measure hedge results if the entity determines at some point during the term of the hedging relationship that the use of the shortcut method was not or no longer is appropriate. See paragraphs 815-20-25-117A through 25-117D.
- Subparagraph superseded by Accounting Standards Update No. 2017-12.
- If the entity is hedging foreign currency risk on an after-tax basis, that the assessment of effectiveness will be on an after-tax basis (rather than on a pretax basis).
-
-
- Documentation requirement
applicable to fair value hedges only:
- For a fair value hedge of a firm commitment, a reasonable method for recognizing in earnings the asset or liability representing the gain or loss on the hedged firm commitment.
- For one or more interest rate risk hedging relationships designated under the portfolio layer method, an analysis to support the entity’s expectation that the hedged layer or layers is anticipated to be outstanding for the designated hedge period (see paragraph 815-20-25-12A for additional guidance).
- Documentation requirement
applicable to cash flow hedges only:
-
For a cash flow hedge of a forecasted transaction, documentation shall include all relevant details, including all of the following:
- The date on or period within which the forecasted transaction is expected to occur.
- The specific nature of asset or liability involved (if any).
- Either of the following:01. The expected currency amount for hedges of foreign currency exchange risk; that is, specification of the exact amount of foreign currency being hedged02. The quantity of the forecasted transaction for hedges of other risks; that is, specification of the physical quantity (that is, the number of items or units of measure) encompassed by the hedged forecasted transaction.
-
If a forecasted sale or purchase is being hedged for price risk, the hedged transaction shall not be specified in either of the following ways:01. Solely in terms of expected currency amounts02. As a percentage of sales or purchases during a period.
-
The current price of a forecasted transaction shall be identified to satisfy the criterion in paragraph 815-20-25-75(b) for offsetting cash flows.
-
The hedged forecasted transaction shall be described with sufficient specificity so that when a transaction occurs, it is clear whether that transaction is or is not the hedged transaction. Thus, a forecasted transaction could be identified as the sale of either the first 15,000 units of a specific product sold during a specified 3-month period or the first 5,000 units of a specific product sold in each of 3 specific months, but it could not be identified as the sale of the last 15,000 units of that product sold during a 3-month period (because the last 15,000 units cannot be identified when they occur, but only when the period has ended).
-
If the hedged risk is the variability in cash flows attributable to changes in a contractually specified component in a forecasted purchase or sale of a nonfinancial asset, identification of the contractually specified component.
-
If the hedged risk is the variability in cash flows attributable to changes in a contractually specified interest rate for forecasted interest receipts or payments on a variable-rate financial asset or liability, identification of the contractually specified interest rate.
-
25-12A For a
closed portfolio of financial assets or one or
more beneficial interests secured by a portfolio
of financial instruments, an entity may designate
as the hedged item or items a hedged layer or
layers if the following criteria are met (this
designation is referred to throughout Topic 815 as
the “portfolio layer method”):
- As part of the initial hedge documentation, an analysis is completed and documented to support the entity’s expectation that the hedged item or items (that is, the hedged layer or layers in aggregate) is anticipated to be outstanding for the designated hedge period. That analysis shall incorporate the entity’s current expectations of prepayments, defaults, and other factors affecting the timing and amount of cash flows associated with the closed portfolio.
- For purposes of its analysis in (a), the entity assumes that as prepayments, defaults, and other factors affecting the timing and amount of cash flows occur, they first will be applied to the portion of the closed portfolio that is not hedged.
- The entity applies the partial-term hedging guidance in paragraph 815-20-25-12(b)(2)(ii) to the assets or beneficial interest used to support the entity’s expectation in (a). An asset that matures on a hedged layer’s assumed maturity date meets this requirement.
See paragraphs 815-25-55-1A
through 55-1E for implementation guidance related
to a closed portfolio with multiple hedged
layers.
25-12B After
a closed portfolio is established in accordance
with paragraph 815-20-25-12A, an entity may
designate new hedging relationships associated
with the closed portfolio without dedesignating
any existing hedging relationships associated with
the closed portfolio if the criteria in paragraph
815-20-25-12A are met for those newly designated
hedging relationships.
Consideration of Prepayment Risk Using the
Portfolio Layer Method
25-118A In a
fair value hedge of interest rate risk designated
under the portfolio layer method in accordance
with paragraph 815-20-25-12A, an entity may
exclude prepayment risk (if applicable) when
measuring the change in fair value of the hedged
item attributable to interest rate risk.
25-139
Concurrent with hedge inception, a private company
that is not a financial institution as described
in paragraph 942-320-50-1 shall document the
following:
- The hedging relationship in accordance with paragraph 815-20-25-3(b)(1)
- The hedging instrument in accordance with paragraph 815-20-25-3(b)(2)(i)
- The hedged item in accordance with paragraph 815-20-25-3(b)(2)(ii), including (if applicable) firm commitments or the analysis supporting a portfolio layer method designation in paragraph 815-20-25-3(c), or forecasted transactions in paragraph 815-20-25-3(d)
- The nature of the risk being hedged in accordance with paragraph 815-20-25-3(b)(2)(iii).
45-1CC If a
breach of a portfolio layer method hedge has
occurred in accordance with paragraph
815-25-40-8(b), an entity shall present in
interest income the basis adjustment associated
with the hedged layer (or portion thereof) that is
no longer outstanding.
45-4 For an
existing portfolio layer method hedge, if the
assets included in the same closed portfolio are
presented in different line items in the statement
of financial position, an entity shall allocate
the portfolio layer method basis adjustment to the
assets’ associated line items in the statement of
financial position using a systematic and rational
method.
55-4A This
implementation guidance on hedged items in fair
value hedges only is organized as follows:
- Subparagraph superseded by Accounting Standards Update No. 2017-12.
- Application of the definition of firm commitment
- Determining whether risk exposure is shared within a portfolio
- Servicing rights as a hedged item.
- Hedged layer in a portfolio layer method hedge.
55-14A If
both of the following conditions exist, the
quantitative test described in paragraph
815-20-55-14 may be performed qualitatively on a
hedge-by-hedge basis and only at hedge
inception:
- The hedged item is a hedged layer in a portfolio layer hedge designated in accordance with paragraph 815-20-25-12A.
- An entity measures the change in fair value of the hedged item based on the benchmark rate component of the contractual coupon cash flows in accordance with paragraph 815-25-35-13.
Using the benchmark rate
component of the contractual coupon cash flows
when all assets have the same assumed maturity
date and prepayment risk (if applicable) does not
affect the measurement of the hedged item results
in all hedged items having the same benchmark rate
component coupon cash flows.
55-14B If the
hedging instrument is a derivative with a notional
amount that changes over time (for example, an
amortizing-notional interest rate swap), the
condition in paragraph 815-20-55-14A(b) can be
satisfied because the swap has a contractual fixed
rate and, thus, the hedged item can be measured on
the basis of a single benchmark component of the
contractual coupon cash flows in accordance with
paragraph 815-25-35-13. An entity that designates
a derivative with a notional amount that changes
over time as a hedging instrument is designating a
single hedging relationship with a single
benchmark rate component of the contractual coupon
cash flows.
Hedged Item in a Portfolio
Layer Method Hedge
55-15A This
implementation guidance describes the hedged item
in a portfolio layer method hedge in several
scenarios.
Scenario A
55-15B For a
closed portfolio of financial assets of $100
million, Entity A designates a single hedged item
of $10 million of the assets that is expected to
be outstanding for the hedge period of Years 1–5.
Entity A designates as the hedging instrument a
spot-starting constant-notional pay-fixed,
receive-variable interest rate swap with a
notional amount of $10 million and a term of 5
years. In this single-layer hedge, the hedged
layer represents $10 million of assets in the
closed portfolio that is not expected to be
affected by prepayments, defaults, or other
factors affecting the timing or amount of cash
flows for the hedge period of Years 1–5.
Scenario B
55-15C For a
closed portfolio of financial assets of $100
million, Entity A designates a hedged item of $20
million of assets that is expected to be
outstanding for the hedge period of Years 1–3. It
also designates a hedged item of $10 million of
the assets in the closed portfolio that is
expected to be outstanding for the hedge period of
Years 1–5. For the $20 million hedged item, Entity
A designates as the hedging instrument a
spot-starting constant-notional pay-fixed,
receive-variable interest rate swap with a
notional amount of $20 million and a term of 3
years. For the $10 million hedged item, Entity A
designates as the hedging instrument a
spot-starting constant-notional pay-fixed,
receive-variable interest rate swap with a
notional amount of $10 million and a term of 5
years. In this scenario, there are two hedged
layers:
- A hedged layer representing $20 million of assets in the closed portfolio that is not expected to be affected by prepayments, defaults, or other factors affecting the timing or amount of cash flows for the hedge period of Years 1–3
- A hedged layer representing $10 million of assets in the closed portfolio that is not expected to be affected by prepayments, defaults, or other factors affecting the timing or amount of cash flows for the hedge period of Years 1–5.
Although the $10 million and
$20 million hedged layers are separately
designated, Entity A should consider the aggregate
hedged amount of $30 million in Years 1–3 when
assessing whether the hedged layers are
anticipated to be outstanding in accordance with
paragraphs 815-20-25-12A(a) and 815-25-35-7A.
Scenario C
55-15D For a
closed portfolio of financial assets of $100
million, Entity A designates a single hedged item
of $30 million for Year 1 that decreases to an
amount of $20 million for Year 2 and $10 million
for Year 3. Entity A designates a single
amortizing-notional swap as the hedging
instrument. In this single-layer hedge, the hedged
layer represents a $30 million stated amount for
Year 1, a $20 million stated amount for Year 2,
and a $10 million stated amount for Year 3, which
reflects the amortizing-notional swap’s
features.
Transition Related to
Accounting Standards Update No. 2022-01, Derivatives
and Hedging (Topic 815): Fair Value Hedging —
Portfolio Layer Method
65-6 The following represents the
transition and effective date information related to
Accounting Standards Update No. 2022-01, Derivatives and
Hedging (Topic 815): Fair Value Hedging — Portfolio
Layer Method:
-
For public business entities the pending content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.
-
For all other entities, the pending content that links to this paragraph shall be effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years.
-
Early adoption is permitted on any date on or after the issuance of Update 2022-01 for any entity that has adopted the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, for the corresponding period. If an entity early adopts the pending content that links to this paragraph in an interim period, the cumulative-effect adjustment for adopting the amendments related to basis adjustments described in (e) shall be reflected as of the beginning of the fiscal year that includes the interim period (that is, the initial application date).
- An entity shall apply the pending content that links to this paragraph to designate more than one portfolio layer method hedging relationship for a single closed portfolio on a prospective basis as of the date of adoption of the amendments in this Update.
- An entity shall apply the pending content that links to this paragraph on basis adjustments, except for the pending content in Subtopic 815-10 (related to disclosures), on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings and the balance sheet line items (as appropriate) as of the date of initial application for portfolio layer method hedges existing as of the date of adoption of the amendments in this Update.
- An entity may elect to adopt the pending content that links to this paragraph in Subtopic 815-10 (related to disclosures) on a prospective basis from the date of initial application of the amendments in Update 2022-01 or on a retrospective basis to each prior period presented after the date of adoption of the amendments in Update 2017-12.
- An entity may reclassify one or
more debt securities from held to maturity to
available for sale if the debt securities are:
- Hedged under the portfolio layer method in accordance with paragraph 815-20-25-12A.
- Classified as held to maturity immediately before the date of adoption of the pending content that links to this paragraph.
- An entity reclassifying one or more
debt securities shall:
-
Determine which debt securities to reclassify no later than 30 days after the date of adoption of the pending content that links to this paragraph. For an entity that has not yet adopted the amendments in Update 2016-13, any unrealized gain or loss on the reclassified debt security at the date of reclassification shall be recorded in accumulated other comprehensive income. For an entity that has adopted the amendments in Update 2016-13, for each reclassified debt security it shall:
- Reverse in retained earnings any allowance for credit losses previously recorded on the held-to-maturity debt security at the date of reclassification.
- Reclassify the debt security to the available-for-sale category at its amortized cost basis (which is reduced by any previous writeoffs but excludes any allowance for credit losses).
- Determine whether an allowance for credit losses is necessary by following the guidance in Subtopic 326-30. If so, that allowance shall be recorded in retained earnings at the date of reclassification.
- Report in accumulated other comprehensive income any unrealized gain or loss on the debt security at the date of reclassification, excluding the amount recorded in the allowance for credit losses in accordance with (iii).
-
Include those reclassified debt securities in one or more closed portfolios that are designated in a portfolio layer method hedge no later than 30 days after the date of adoption of the pending content that links to this paragraph. Neither a minimum amount of the closed portfolio nor a minimum hedge period must be designated to meet this requirement.
-
An entity shall provide the disclosures in accordance with paragraph 320-10-50-10 for reclassified debt securities in the period of reclassification.
-
That reclassification, in and of itself, would not 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.
-
- An entity shall disclose the
following in the period that the entity adopts the
pending content that links to this paragraph:
- The nature of and reason for the change in accounting principle related to accounting for hedge basis adjustments.
- The effect of adoption on any line item in the statement of financial position, if material, as of the beginning of the first period for which the pending content that links to this paragraph is applied. Presentation of the effect on financial statement subtotals is not required.
-
The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the first period for which the pending content that links to this paragraph is applied.
- An entity that issues interim financial statements shall provide the disclosures in (i) in each interim financial statement of the fiscal year of adoption and the annual financial statement of the fiscal year of adoption.
ASC 815-25
Pending Content (Transition
Guidance: ASC 815-20-65-6)
35-1 Gains and losses on a
qualifying fair value hedge shall be accounted for
as follows:
- The gain or loss on the hedging instrument shall be recognized currently in earnings, except for amounts excluded from the assessment of effectiveness that are recognized in earnings through an amortization approach in accordance with paragraph 815-20-25-83A. All amounts recognized in earnings shall be presented in the same income statement line item as the earnings effect of the hedged item.
- The gain or loss (that is, the change in fair value) on the hedged item attributable to the hedged risk shall adjust the carrying amount of the hedged item and be recognized currently in earnings except as described in (c).
- For one or more existing hedged layer or layers that are designated under the portfolio layer method in accordance with paragraph 815-20-25-12A, the gain or loss (that is, the change in fair value) on the hedged item attributable to the hedged risk shall not adjust the carrying value of the individual beneficial interest or individual assets in or removed from the closed portfolio. Instead, that amount shall be maintained on a closed portfolio basis and recognized currently in earnings.
35-6 If a hedged item is
otherwise measured at fair value with changes in
fair value reported in other comprehensive income
(such as an available-for-sale debt security), the
adjustment of the hedged item’s carrying amount
discussed in paragraph 815-25-35-1(b) shall be
recognized in earnings rather than in other
comprehensive income to offset the gain or loss on
the hedging instrument. If the hedged item is a
hedged layer designated in a portfolio layer
method hedge on a closed portfolio in accordance
with paragraph 815-20-25-12A and the closed
portfolio includes only available-for-sale debt
securities, the entire gain or loss (that is, the
change in fair value) on the hedged item
attributable to the hedged risk shall be
recognized in earnings rather than in other
comprehensive income to offset the gain or loss on
the hedging instrument. If the closed portfolio
includes available-for-sale debt securities and
assets that are not available-for-sale debt
securities, an entity shall determine the portion
of the change in fair value on the hedged item
attributable to the hedged risk associated with
the available-for-sale debt securities using a
systematic and rational method. That amount shall
be recognized in earnings rather than in other
comprehensive income. However, an entity shall not
adjust the carrying amount of the individual
available-for-sale debt securities included in the
closed portfolio in accordance with paragraph
815-25-35-1(c).
Existing Portfolio Layer Method
Hedges
35-7A For each closed
portfolio with one or more hedging relationships
designated and accounted for under the portfolio
layer method in accordance with paragraph
815-20-25-12A, an entity shall perform and
document at each effectiveness assessment date an
analysis that supports the entity’s expectation
that the hedged layer or layers in aggregate is
still anticipated to be outstanding for the
designated hedge period. That analysis shall
incorporate the entity’s current expectations of
prepayments, defaults, and other factors affecting
the timing and amount of cash flows associated
with the closed portfolio using a method
consistent with the method used to perform the
analysis in paragraph 815-20-25-12A(a) and
(b).
35-9 An adjustment of the
carrying amount of a hedged interest-bearing
financial instrument that is required by paragraph
815-25-35-1(b) and an adjustment that is
maintained on a closed portfolio basis in a
portfolio layer method hedge in accordance with
paragraph 815-25-35-1(c) shall be amortized to
earnings. Amortization shall begin no later than
when the hedged item ceases to be adjusted for
changes in its fair value attributable to the risk
being hedged.
35-9A If, as permitted by
paragraph 815-25-35-9, an entity amortizes the
adjustment to the carrying amount of the hedged
item during an existing partial-term hedge of an
interest-bearing financial instrument or amortizes
the basis adjustment in an existing portfolio
layer method hedge, the entity shall fully
amortize that adjustment by the hedged item’s
assumed maturity date in accordance with paragraph
815-25-35-13B. For a discontinued hedging
relationship, all remaining adjustments to the
carrying amount of the hedged item shall be
amortized over a period that is consistent with
the amortization of other discounts or premiums
associated with the hedged item in accordance with
other Topics (for example, Subtopic 310-20 on
receivables — nonrefundable fees and other costs).
See paragraphs 815-25-40-9 through 40-9A for
further guidance on accounting for a basis
adjustment attributable to a discontinued
portfolio layer method hedge.
35-10 An asset or liability
that has been designated as being hedged and
accounted for pursuant to this Section remains
subject to the applicable requirements in
generally accepted accounting principles (GAAP)
for assessing impairment or credit losses for that
type of asset or for recognizing an increased
obligation for that type of liability. Those
impairment or credit loss requirements shall be
applied after hedge accounting has been applied
for the period and the carrying amount of the
hedged asset or liability has been adjusted
pursuant to paragraph 815-25-35-1(b). A portfolio
layer method basis adjustment that is maintained
on a closed portfolio basis for an existing hedge
in accordance with paragraph 815-25-35-1(c) shall
not be considered when assessing the individual
assets or individual beneficial interest included
in the closed portfolio for impairment or when
assessing a portfolio of assets for impairment. An
entity may not apply this guidance by analogy to
other components of amortized cost basis. Because
the hedging instrument is recognized separately as
an asset or liability, its fair value or expected
cash flows shall not be considered in applying
those impairment or credit loss requirements to
the hedged asset or liability.
35-11 This Subtopic
implicitly affects the measurement of credit
losses under Subtopic 326-20 on financial
instruments measured at amortized cost by
requiring the present value of expected future
cash flows to be discounted by the new effective
rate based on the adjusted amortized cost basis in
a hedged loan. Paragraph 326-20-55-9 requires
that, when the amortized cost basis of a loan has
been adjusted under fair value hedge accounting,
the effective rate is the discount rate that
equates the present value of the loan’s future
cash flows with that adjusted amortized cost
basis. That paragraph states that the adjustment
under fair value hedge accounting for changes in
fair value attributable to the hedged risk under
this Subtopic shall be considered to be an
adjustment of the loan’s amortized cost basis. As
discussed in that paragraph, the loan’s original
effective interest rate becomes irrelevant once
the recorded amount of the loan is adjusted for
any changes in its fair value. Because paragraph
815-25-35-10 requires that the loan’s amortized
cost basis be adjusted for hedge accounting before
the requirements of Subtopic 326-20 are applied,
this Subtopic implicitly supports using the new
effective rate and the adjusted amortized cost
basis. A portfolio layer method basis adjustment
that is maintained on a closed portfolio basis for
an existing hedge in accordance with paragraph
815-25-35-1(c) shall not adjust the amortized cost
basis of the individual assets or individual
beneficial interest included in the closed
portfolio. An entity may not apply this guidance
by analogy to other components of amortized cost
basis.
35-12 This guidance applies
to all entities applying Subtopic 326-20 to
financial assets that are hedged items in a fair
value hedge, regardless of whether those entities
have delayed amortizing to earnings the
adjustments of the loan’s amortized cost basis
arising from fair value hedge accounting until the
hedging relationship is dedesignated. The guidance
on recalculating the effective rate is not
intended to be applied to all other circumstances
that result in an adjustment of a loan’s amortized
cost basis and is not intended to be applied to
the individual assets or individual beneficial
interest in an existing portfolio layer method
hedge closed portfolio.
35-13B For a fair value hedge
of interest rate risk in which the hedged item is
designated for a partial term in accordance with
paragraph 815-20-25-12(b)(2)(ii), an entity may
measure the change in the fair value of the hedged
item attributable to interest rate risk using an
assumed term that begins when the first hedged
cash flow begins to accrue and ends at the end of
the designated hedge period. The assumed issuance
of the hedged item occurs on the date that the
first hedged cash flow begins to accrue. The
assumed maturity of the hedged item occurs at the
end of the designated hedge period. An entity may
measure the change in fair value of the hedged
item attributable to interest rate risk in
accordance with this paragraph when the entity is
designating the hedged item in a hedge of both
interest rate risk and foreign exchange risk. In
that hedging relationship, the change in carrying
value of the hedged item attributable to foreign
exchange risk shall be measured on the basis of
changes in the foreign currency spot rate in
accordance with paragraph 815-25-35-18.
Additionally, an entity may have one or more
separately designated partial-term hedging
relationships outstanding at the same time for the
same debt instrument (for example, 2 outstanding
hedging relationships for consecutive interest
cash flows in Years 1‒3 and consecutive interest
cash flows in Years 5‒7 of a 10-year debt
instrument).
Hedged Item Is Designated Under the
Portfolio Layer Method
Voluntary Dedesignations
40-7A An entity may elect to
discontinue (or partially discontinue) hedge
accounting prospectively for all or a portion of
the hedged layer for one or more hedging
relationships associated with the closed portfolio
at any time if a breach has not occurred in
accordance with paragraph 815-25-40-8(b) and a
breach is not anticipated in accordance with
paragraph 815-25-40-8(a). If multiple hedged
layers are associated with the closed portfolio,
the entity may voluntarily elect to dedesignate
(or partially dedesignate) any hedges associated
with that closed portfolio.
Breaches of the Closed Portfolio
40-8 For one or more hedging
relationships designated under the portfolio layer
method in accordance with paragraph 815-20-25-12A,
an entity shall discontinue (or partially
discontinue) hedge accounting in the following
circumstances:
- If the entity cannot support on a subsequent testing date that the hedged layer or layers are anticipated to be outstanding for the designated hedge period in accordance with paragraph 815-25-35-7A (that is, a breach is anticipated), it shall discontinue (or partially discontinue) hedge accounting for one or more hedging relationships for the portion of the hedged item that is no longer anticipated to be outstanding for the designated hedge period
- If on a subsequent testing date the outstanding amount of the closed portfolio of financial assets or one or more beneficial interests is less than the hedged layer or layers (that is, a breach has occurred), the entity shall discontinue (or partially discontinue) hedge accounting for one or more hedging relationships for the portion of the hedged item that is no longer outstanding.
40-8A In the event of either
an anticipated breach (as described in paragraph
815-25-40-8(a)) or a breach that has occurred (as
described in paragraph 815-25-40-8(b)), if
multiple hedged layers are associated with a
closed portfolio, an entity shall determine which
hedge or hedges to discontinue (or partially
discontinue) in accordance with an accounting
policy election. That accounting policy election
shall specify a systematic and rational approach
to determining which hedge or hedges to
discontinue (or partially discontinue). An entity
shall establish its accounting policy no later
than when it first anticipates a breach or when a
breach has occurred (whichever comes first). After
an entity establishes its accounting policy, it
shall consistently apply its accounting policy to
all portfolio layer method breaches (anticipated
and occurred).
Accounting for Basis Adjustments
40-9 If a
portfolio layer method hedging relationship is
discontinued (or partially discontinued) in a
voluntary dedesignation in accordance with
paragraph 815-25-40-7A or in anticipation of a
breach in accordance with paragraph
815-25-40-8(a), the basis adjustment associated
with the dedesignated amount as of the
discontinuation date shall be allocated to the
remaining individual assets in the closed
portfolio that supported the dedesignated hedged
layer using a systematic and rational method. An
entity shall amortize those amounts over a period
that is consistent with the amortization of other
discounts or premiums associated with the
respective assets in accordance with other Topics
(for example, Subtopic 310-20 on receivables —
nonrefundable fees and other costs).
40-9A For a portfolio layer
method hedging relationship that is discontinued
because a breach has occurred in accordance with
paragraph 815-25-40-8(b), as of the
discontinuation date an entity shall:
- Determine the portion of the basis adjustment associated with the amount of the hedged layer that exceeds the closed portfolio (that is, the portion of the basis adjustment associated with the breach) using a systematic and rational method and immediately recognize that amount in interest income in accordance with paragraph 815-20-45-1CC
- Disclose the information specified in paragraph 815-10-50-5C for the breach.
A closed portfolio may simultaneously have a
layer or layers that have been breached and a
layer or layers that it anticipates will be
breached. In that case, an entity shall apply the
guidance in this paragraph for the breach or
breaches that have occurred and the guidance in
paragraph 815-25-40-9 for the anticipated breach
or breaches.
55-1 Paragraph superseded by
Accounting Standards Update No. 2022-01.
Implementation Guidance
Portfolio Layer Method Hedges — Multiple
Hedged Layers
55-1A This implementation
guidance demonstrates how an entity should apply
the following aspects of the portfolio layer
method if it elects to designate multiple hedged
layers of a single closed portfolio:
-
Performing the similar-asset assessment upon initial designation of a portfolio layer method hedge
-
Evaluating whether the entity may continue to apply the guidance for a portfolio layer method hedge after initial designation.
55-1B For the purposes of
illustrating the guidance in paragraph
815-25-55-1A, the implementation guidance in
paragraphs 815-25-55-1C through 55-1D assumes that
Entity A designates multiple hedged layers of a
closed portfolio of 5-year and 10-year prepayable
loans originated on the hedge inception date.
Similar-Asset Assessment at Hedge
Designation
55-1C Entity A designates
hedged layers with assumed maturity dates of three
years and seven years, respectively. When applying
the similar-asset assessment for a portfolio hedge
in accordance with paragraph 815-20-25-12(b)(1),
Entity A should consider all assets in the closed
portfolio for the 3-year hedged layer but consider
only the 10-year assets for the 7-year hedged
layer. That is, an entity should consider the
assets that support the hedged layer.
Subsequent Assessment
55-1D After initial hedge
designation, Entity A should continue to assess
whether the individual three-year and seven-year
hedged layers meet the requirements in paragraph
815-25-35-7A on the basis of the same assets used
to perform the similar-asset assessments in
accordance with paragraph 815-25-55-1C. For Years
1–3, the entity should consider whether the hedged
layers in aggregate are anticipated to be
outstanding.