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FASB to Issue Flexible Hedge Accounting Technique Mid-April

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

U.S. accounting rulemakers plan to issue a flexible hedge accounting rule called the portfolio-layer-method mid-April, according to a source.

The rule will 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 guidance will facilitate more robust financial risk management primarily for banks and financial institutions,” Dan Gentzel, global head of hedge accounting at Chatham Financial said on February 9, 2022. “What it’s really geared toward doing is allowing hedging of a pool of fixed-rate financial assets and that’s hard to do under the current accounting framework,” he said.

Chatham Financial, headquartered in Kennett Square, Pennsylvania, is the largest independent financial risk management advisory and technology firm, specializing in debt and derivative solutions.

“The current last-of-layer model has limitations and does not facilitate the dynamic risk management strategies desired by financial risk managers,” Gentzel explained. “They want to take as much of their fixed-rate assets as they can, put them in a portfolio, to be able to hedge that exposure – and so this guidance that’s coming out is going to facilitate that.”

Companies typically use hedge accounting as a way to protect their businesses from currency exposure and market volatility. And more are hedging fixed-rate assets, including credit unions, as a result of simpler accounting rules from the FASB, accounting practitioners said.

“The big thing that I see is the coming new rule allows people who want to dip their toe in to set up their closed portfolio to put a hedge on, knowing that they can come back later and put another hedge on, and another one,” Ruth Hardie, senior director, client services at Hedge Trackers, LLC said on February 8. “So they don’t have to do it all at once and that will allow them to do some kind of dollar cost averaging – it also allows them to start small knowing that they are not limiting themselves,” she said.

Silicon Valley-based Hedge Trackers provides globally compliant hedge accounting and derivatives accounting capabilities to U.S. corporations and financial institutions.

“Relevant to the current guidance, they (credit unions) are struggling to get the coverage they need,” Hardie said. “They have plenty they want to hedge, just not feasible under current rule sets. The new guidance with help with that.”

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 rules will finalize a revised version of Proposed Accounting Standards Update (ASU) No. 2021-002Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, which was issued last year for public comment.


This article originally appeared in the February 10, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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