FASB Reaches Tentative Decisions Related to Its Project on Last-of-Layer Hedging
At its October 16, 2019, meeting, the FASB reached tentative decisions related to its project on last-of-layer hedging. The Board discussed the following topics:
- Multiple-layer issues.
- Fair value hedge basis adjustment issues.
Summaries of the Board’s deliberations are provided below.
Multiple-Layer Issues
At the Board meeting, the FASB tentatively decided that an entity would be permitted to:
- Designate multiple layers (i.e., designate more than one hedging relationship for a closed portfolio of prepayable financial assets); however, the entity would be required to dedesignate “the entirety of one or more hedging relationships affected by an actual breach. An actual breach occurs when the sum of the hedged items associated with a closed portfolio is greater than the total assets in the closed portfolio in the current period.”
- Partially dedesignate a last-of-layer hedging relationship when a breach is anticipated. In an anticipated breach, the sum of the hedged items associated with a closed portfolio is not greater than the total assets in the closed portfolio in the current period, but is expected to be so in a future period.
- Document, at hedge inception, “a sequence in which hedging relationships associated with a closed portfolio would be dedesignated in the case of an actual breach.” An entity that does not document such a sequence at hedge inception would be required to “dedesignate all hedging relationships associated with the closed portfolio” if an actual breach were to occur in the future.
In addition, the Board tentatively decided that all hedging relationships associated with the closed portfolio must be supported by all assets in the closed portfolio. Therefore, “all the assets in the closed portfolio must have a contractual maturity date after the latest partial-term hedge matures, and all financial assets in the closed portfolio must be prepayable by the earliest hedging relationship’s maturity date.”
Fair Value Hedge Basis Adjustment Issues
The Board made the following tentative decisions about both the existing single-layer and proposed multiple-layer last-of-layer models:
- Fair value hedge basis adjustments may not be allocated to “the assets in the closed portfolio during an outstanding last-of-layer hedge.”
- Last-of-layer fair value hedge basis adjustments on an outstanding hedge may not be considered in the determination of an allowance under the current expected credit loss model.
- Last-of-layer fair value hedge basis adjustments must “be presented as a reconciling item in disclosures required by other areas of GAAP.”
- Entities must “recognize and present the fair value hedge basis adjustment associated with an actual breach in the income statement based on how the assets that caused the breach were removed from the closed portfolio.”
Next Steps
The FASB staff will draft a proposed Accounting Standards Update for external review.
For more information on the topics discussed, see the meeting handout.