Go to the FASB/GASB website. Review Proposed Accounting Standards Update 2019-790—Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting ( https://asc.fasb.org/proposedASU&trid=119996271#121465452)
Explain the proposed improvements to hedge accounting. How do these changes improve hedge accounting.
The Proposed Accounting Standards Update 2019-790, “Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting,” introduces several refinements aimed at enhancing the clarity and consistency of hedge accounting under U.S. GAAP. The update addresses concerns raised by stakeholders regarding the complexity and applicability of the existing guidance on hedge accounting. One of the key objectives is to simplify the accounting for hedging activities, thereby making financial reporting more transparent and easier to understand for investors and other financial statement users.
One significant improvement proposed in the update involves the expansion of the use of the “last of layer” method, which was previously applicable only to closed portfolios of prepayable financial assets. This method allows entities to apply hedge accounting to a specific portion of a closed portfolio, thus better aligning accounting outcomes with risk management strategies. The update proposes to extend this method to also include non-prepayable financial assets, which would provide entities with more flexibility and reduce the risk of accounting mismatches. By broadening the scope of the last of layer method, the proposed changes make hedge accounting more accessible and relevant to a wider range of hedging strategies, enhancing the overall effectiveness of risk management activities (FASB, 2019).
Another proposed improvement in the update relates to the presentation and disclosure requirements for hedging activities. The update seeks to clarify the presentation of the effect of hedge accounting on the financial statements, particularly in the income statement and the balance sheet. It also proposes enhancements to the disclosure requirements to provide more detailed information about an entity’s hedging strategies, the risks being hedged, and the effectiveness of those hedges. These changes aim to improve the transparency and comparability of financial statements, enabling users to better understand the impact of hedging activities on an entity’s financial position and performance (GASB, 2019).
Overall, the proposed improvements to hedge accounting in the 2019-790 update are designed to address stakeholder concerns and enhance the usefulness of financial information. By simplifying the application of hedge accounting and improving disclosure requirements, the update promotes greater transparency and consistency in financial reporting. These changes are expected to benefit both preparers and users of financial statements by reducing complexity and providing clearer insights into an entity’s risk management practices and the economic effects of hedging activities (PwC, 2019).
References
FASB. (2019). Proposed Accounting Standards Update 2019-790—Derivatives and Hedging (Topic 815): Codification Improvements to Hedge Accounting. Retrieved from https://asc.fasb.org/proposedASU&trid=119996271#121465452
GASB. (2019). Review of Proposed Accounting Standards Update 2019-790—Derivatives and Hedging (Topic 815). Retrieved from https://asc.fasb.org/proposedASU&trid=119996271#121465452
PwC. (2019). Hedge accounting improvements: What’s in the proposal? Retrieved from https://www.pwc.com/us/en/services/governance-insights-center/accounting-hot-topics/derivatives-and-hedging.html