Derivatives

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Derivatives and Hedging (Topic 815): Hedge Accounting Improvements

Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract

Derivatives – FASB Discusses Derivatives

Exposure Draft - Proposed Accounting Standards Update 2021-002 —Derivatives and Hedging (Topic 815): Fair Value Hedging —Portfolio Layer Method

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Derivatives and Hedging (Topic 815): Hedge Accounting Improvements

Summary - The ASU enables entities to apply hedge accounting to a greater number of highly effective economic hedges in the following five areas:

Similar Risk Assessment for Cash Flow Hedges: The ASU expands the hedged risks permitted to be aggregated in a group of individual forecasted transactions, enabling entities to apply hedge accounting to potentially broader portfolios of forecasted transactions.
Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments: The ASU establishes a model that enables hedge accounting to be applied more broadly to choose-your-rate debt and address existing diversity in practice.
Cash Flow Hedges of Nonfinancial Forecasted Transactions: The ASU expands hedge accounting for forecasted purchases and sales of nonfinancial assets subject to certain criteria.
Net Written Options as Hedging Instruments: The ASU accommodates differences in the loan and swap markets that resulted from reference rate reform, eliminating the requirement for the net written option test in certain instances.
Foreign-Currency-Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge): The ASU eliminates the recognition and presentation mismatch related to a dual hedge strategy (that is, a hedge for which a foreign-currency-denominated debt instrument is both designated as the hedging instrument in a net investment hedge and designated as the hedged item in a fair value hedge of interest rate risk).

This ASU is effective for public business entities for annual reporting periods beginning after December 15, 2026, and interim periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after December 15, 2027, and interim periods within those annual reporting periods. Early adoption is permitted on any date on or after the issuance of ASU No. 2025-09.

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Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract

Summary - The ASU clarifies derivative scope exceptions for certain contracts with underlyings that are based on the operations or activities of one of the parties to the contract.

The ASU also clarifies the applicability of ASC Topic 606, Revenue from Contracts with Customers, and its interaction with other ASC Topics (including ASC Topic 815 on derivatives and hedging and ASC Topic 321 on equity securities), in the accounting for share-based noncash consideration (such as warrants or shares) received from a customer for the transfer of goods or services.

This ASU is effective for annual periods beginning after December 15, 2026, and interim periods within those annual periods.

Early adoption is permitted in an interim or annual period in which financial statements have not yet been issued (or made available for issuance).

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Derivatives – FASB Discusses Derivatives

Summary - As reported in its “Summary of Decisions” publication, the FASB met on December 6, 2023, and discussed whether to add a project to its technical agenda to refine the scope of Topic 815, Derivatives and Hedging, and began initial deliberations. The FASB discussed feedback on the application of the definition of a derivative to various arrangements with contingent features that the FASB received in comment letters on the June 2021 Invitation to Comment, Agenda Consultation, and through additional stakeholder outreach. The FASB decided to add a project to its technical agenda to refine the scope of Topic 815.

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Exposure Draft - Proposed Accounting Standards Update 2021-002 —Derivatives and Hedging (Topic 815): Fair Value Hedging —Portfolio Layer Method

Summary - The FASB issued a proposed Accounting Standards Update (ASU) intended to better align hedge accounting with an organization’s risk management strategies. Stakeholders are encouraged to review and provide comment on the proposed ASU by July 5, 2021.

In 2017, the FASB issued a new hedging standard to better align the economic results of risk management activities with hedge accounting. The new standard increased transparency around how the results of hedging activities are presented, both on the face of the financial statements and in the footnotes, for investors and analysts when hedge accounting is applied.

One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgaged-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows.

Since issuing the hedging standard, stakeholders have told the FASB that the ability to elect hedge accounting for a single layer is useful, but hedge accounting could better reflect risk management activities if expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

The proposed ASU would expand the current single-layer model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments under the method. To reflect that expansion, the last-of-layer method would be renamed as the portfolio layer method.

Additionally, the proposed ASU would:

Clarify eligible hedging instruments in a single-layer strategy;
Provide additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would be applicable to both the current single-layer model and the proposed multiple-layer model; and
Indicate how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

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