By Denise Lugo
The FASB on April 28, 2020, published a staff question-and-answer (Q&A) document to clarify the effects of the novel coronavirus (COVID-19) pandemic on cash flow hedge accounting.
The guidance addresses two questions related to applying Topic 815, Derivatives and Hedging, the main accounting rules on discontinuing cash flow hedge accounting and on when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings.
Companies raised questions to FASB staff about how the postponement or cancellation of forecasted transactions related to the effects of the COVID-19 pandemic should be considered when applying cash flow hedge accounting under Topic 815, a text of the document states.
The Q&A specifically addresses:
- when cash flow hedge accounting has been discontinued, whether delays in the timing of the forecasted transactions related to the effects of the COVID-19 pandemic can be considered rare cases caused by extenuating circumstances outside the control or influence of an entity?
It explains that the exception in paragraph 815-30-40-4 can be applied for rare cases caused by extenuating circumstances “that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic.”
The provisions require the use of judgment based on facts and circumstances, the text explains. This means that for dedesignated hedges that are affected, if the forecasted transaction is “probable of occurring” after the additional two-month period, the entity would continue to keep the amount reported in AOCI associated with that forecasted transaction until it affects earnings. This only applies when the forecasted transaction remains “probable of occurring.”
Other things to consider when applying the exception, it whether the forecasted transaction remains “probable” over a time period that is reasonable given the nature of the entity’s business, the nature of the forecasted transaction, and the magnitude of the disruption to the entity’s business related to the effects of the COVID-19 pandemic.
The Q&A clarifies that if it no longer “probable” that the forecasted transaction will occur within that reasonable time period beyond the additional two-month period, the exception would not apply and amounts previously reported in AOCI would have to be immediately reclassified into earnings. That would have to be disclosed in the entity’s interim and annual financial statements.
The second question FASB staff addressed is:
- if an entity determines that amounts deferred in AOCI should be reclassified to earnings in accordance with paragraph 815-30-40-5 because of missed forecasts related to the effects of the COVID-19 pandemic, should those missed forecasts be considered when determining whether the entity has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions?
The document states that those missed forecasts related to the effects of the COVID-19 pandemic need not be considered, but companies need to use judgment.
FASB staff accountants said the guidance did not contemplate forecasts changing so rapidly as a result of a pandemic. If the entity determines that a missed forecast is related to the effects of the COVID-19 pandemic, it would continue to follow paragraph 815-30-40-5 and disclose the associated amounts in accordance with paragraph 815-10-50-4C(f), staff said.
That clarification was given with the caveat that if the entity has not yet adopted the amendments in Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, it should follow the disclosure requirements in paragraph 815-30-50-1(e).
This article originally appeared in the April 29, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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