The FASB has recently issued important new guidance with respect to hedge accounting. The update, ASU 2017-12, is required to be adopted for fiscal years beginning after December 15, 2018. It reduces the administrative burden, and related risk of potential restatements, in the following ways:
- Simplifies the criteria for using the "short-cut method" and "critical terms match"
- Allows for contractually specified risk-component hedging
- Allows for qualitative testing for "highly effective" hedges
- Removes the concept of hedge ineffectiveness
In the attached article, A&M's Chandu Chilakapati concisely summarizes the key points in ASU 2017-12, and provides implementation guidance that highlights the benefits of early adoption. It also provides important new information for hedgers of non-financial assets. Last but not least, it concludes by advising affected companies to begin their assessment of these new rules in early to mid-2018, to allow sufficient time to prepare for implementation.
It’s just over a year until the scheduled effective date for Accounting Standards Update 2017-12, the long-awaited update to the Financial Accounting Standards Board’s derivatives and hedge accounting standard. The goal of the update, issued in August of this year, is to align financial statements with the hedging and risk-management programs of financial-statement issuers. To accomplish the goal, FASB made targeted improvements to the standard for electing, performing, and maintaining hedge accounting.