February 20, 2018 — Hedging — FASB Discusses Feedback on Key Implementation Issues

Under the transition provisions in the ASU, an entity may elect to change its way of measuring the hedged item in an existing fair value hedge of interest rate risk to use the benchmark rate component of the contractual cash flows instead of using the total contractual cash flows. An entity that makes this election may rebalance its hedging relationship by dedesignating a portion of the hedged item and reclassifying the related basis adjustment to opening retained earnings as of the initial application date. In its responses to technical inquiries, the FASB staff clarified that entities may also rebalance such hedging relationships in a manner other than that specified in the ASU (e.g., by increasing or decreasing the designated notional amount of the hedging instrument or increasing the notional amount of the hedged item). The staff has cautioned, however, that entities are prohibited from rebalancing a hedging relationship by entering into either a new hedging instrument or a new hedged item.

The staff clarified that the ASU provided no transition guidance for entities switching from a full-term fair value hedging strategy to a partial-term hedging strategy because implementation of a partial-term hedging strategy would require an entity to enter into a new hedging instrument. Under the ASU, this can only be accomplished by dedesignating and redesignating the hedging relationship.

The staff indicated that the purpose of the ASU’s fair value hedge basis adjustment disclosures is to provide users with the information they need to evaluate the amount, timing, and uncertainty of future cash flows associated with hedged assets or liabilities. Specifically, the ASU’s disclosures provide users with additional information about fair value basis adjustments that will not affect future cash flows; therefore, basis adjustments that will affect future cash flows, such as foreign exchange risk basis adjustments, are excluded from the ASU’s disclosure requirements. In addition, for a hedged available-for-sale debt security, the carrying amount that an entity should disclose should be its amortized cost basis and not its fair value.

An entity cannot account for the cross-currency basis spread as a separate component of the hedging derivative that can be excluded from the assessment of effectiveness; however, under the mechanics of the spot method, the cross-currency basis spread would still be an element of the overall excluded amount.

Entities should follow the general principle that changes in the fair value of the hedging derivative attributable to changes in the spot rate should be recorded in the currency translation adjustment (CTA) in other comprehensive income and, at the end of the hedging relationship, the only amounts remaining in CTA related to the swap should be the “spot changes on the notional amount of the net investment.”

An entity would apply the preceding principle in circumstances in which the hedging instrument is an off-market cross-currency interest-rate swap (i.e., the swap has a fair value of other than zero at hedge inception). Therefore, “any systematic and rational [amortization] approach [for the excluded component] that results in the off-market nature of the swap equaling zero at the end of the hedging relationship” will be acceptable. The staff and the Board acknowledged stakeholder concerns that the amortization approach for the excluded component under the ASU could lead to certain structuring opportunities. However, the staff indicated, and the Board tentatively agreed, that “structuring [the terms] of cross-currency interest-rate swaps . . . to achieve a specific accounting result is not considered rational in the context of a systematic and rational approach.”