Commodity Hedgers: What You Need to Know About the New Hedge Accounting Exposure Draft

Hedge accounting is changing – for the better, no less!

There are a few items in FASB’s Sept. 8 Exposure Draft that should be noted, as these will affect all commodity hedgers taking special hedge accounting:

• The FASB expanded bifurcation of risk in its Exposure Draft. This is particularly exciting for commodity hedgers, because it will allow their financials to reflect “perfect” hedge accounting treatment for highly correlated hedge relationships.
• Even more hedge relationships will have a better chance of being highly effective because hedgers will be allowed to evaluate effectiveness against any contractually identified component (diesel surcharge in a transportation contract, nickel component of stainless steel purchase, etc.), regardless of delivery location, grade or other basis differences.
• Effectiveness measurement will be eliminated as a reporting concept, reducing administration and modeling requirements.
• All changes in the value of a qualifying derivative cash flow hedge will be recorded in equity in other comprehensive income until the hedged item impacts earnings.
• Once hedge effectiveness is established at inception, ongoing retrospective and prospective effectiveness testing can be replaced with qualitative assurances that the critical terms of the hedged item have not changed.
• Initial quantitative effectiveness testing is no longer required “contemporaneously” with hedge execution, but will be required before the earlier of the date financial statements are issued for that quarter or when the hedge relationship is terminated.
• Disclosure tables have changed and more disclosures will be required.

For more information on these recent accounting changes contact us at 408-350-8580, or visit gtreasury.com.