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FASB to Finalize Proposed Hedge Accounting Model, With Revisions

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

The FASB on November 10, 2021, voted to finalize a revised version of its May hedge accounting proposal – narrow rules that are in high demand because of the current interest rate environment.

The guidance would enable the use of a more flexible hedging model that more closely aligns with companies’ risk management activities.

The board affirmed it would expand the last-of-layer model, a technique that was introduced four years ago, to the portfolio-layer-method, which allows more than one hedge against a closed portfolio of assets.

Currently, entities are only able to do a single constant-notional hedge against a single closed portfolio of assets.

The board voted 5 to 2 to expand the scope of assets eligible for portfolio layer method hedging to include all financial assets. In addition, to remove the requirement that all assets in the closed portfolio have a contractual maturity date on or after the earliest-ending hedge period.

“The key in my mind is it’s a closed portfolio,” FASB Chair Richard Jones said. “You have defined what you’re hedging and the hedging instruments and to me that’s key – it’s almost as if you’ve created a single instrument that you’re hedging, and now you’re trying to see do your hedges work or not.”

For public companies, the rules will take effect for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. All other entities would adopt it for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption would be permitted.

Among transition requirements, the board agreed to allow companies to reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the rules but only if they intend to apply portfolio layer method hedging to a closed portfolio that includes those debt securities.

The decision of which securities to reclassify “must be made within 30 days after the date of adoption, and the securities must be included in a closed portfolio that is designated in a portfolio layer method hedge within that 30-day period,” the board said.

The FASB issued Proposed Accounting Standards Update (ASU) No. 2021-002Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, and received 25 comment letter responses by its July deadline, including from financial institutions, state societies and industry trade groups.

The board also voted as follows:

  • In relation to fair value hedge basis adjustments, affirmed it would: require an entity to maintain fair value hedge basis adjustments at the closed portfolio level for a currently designated hedge; prohibit an entity from considering portfolio layer method fair value hedge basis adjustments on a currently designated hedge in its determination of credit losses.
  • Agreed to align the anticipated and actual breach guidance to: allow partial de-designation; require an entity to follow a rational approach to determine which layer or layers to de-designate in a multiple-layer hedge.
  • For an actual breach, to require that an entity: present the fair value hedge basis adjustment associated with a breach in interest income; disclose for each actual breach the amount of the fair value hedge basis adjustment recognized in interest income because of the breach, and the circumstances that led to the breach.
  • To require disclosure of portfolio layer method fair value hedge basis adjustments related to currently designated hedges as reconciling items in disclosures outside hedge accounting; and the same hedge accounting disclosures for multiple-layer hedges that are required for current single-layer hedges.


This article originally appeared in the November 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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