When the FASB created new hedge accounting requirements with the adoption of SFAS 133 (long ago…) many companies found that the burden of the new requirements and the technical complexity they presented made it simply impractical to use hedge accounting.
As a result, in many cases, the economics of a company’s risk management activities was not conveyed in their financial statements.
The FASB and IASB’s path towards new, and hopefully better, accounting for hedging activities has been almost as winding and twisting as actually trying to qualify for hedge accounting. Both boards originally put hedge accounting in the overall financial instruments project. When the complexity of this project increased, both boards moved hedge accounting to a back burner, and eventually it fell by the wayside for the FASB while the IASB did revise their hedge guidance.
The FASB met on November 5 to vote on whether to move this project to the active project agenda. The board materials included the following list of areas where changes may be considered:
- Hedge effectiveness requirements
- Component hedging for financial and non-financial hedged items
(A potentially great way to match risk management and accounting)
- Elimination of the short-cut and critical terms effectiveness assessment tools
(New effectiveness requirements would make them obsolete)
- Voluntary de-designation of a hedging relationship
(Should this opportunity be removed)?
- Recording ineffectiveness for under-effective cash flow hedges(How to measure this issue in the income statement)
- Adjusting the benchmark interest rates
- Simplifying hedge accounting documentation requirements
(Oh please do this!)
- Reviewing disclosure requirements
Hopefully the Board may move towards some targeted changes and improvements to hedge accounting in a direct fashion, which would be welcome changes for all of us using hedge accounting, and which may make it feasible for some of us who do not use hedge accounting because of the burdensome requirements to reconsider this decision, and get a conceptually better accounting outcome for our risk management activities.