Impact of Upcoming FASB Changes on FX Hedgers

Q3 is the new FASB deadline for issuance of an Exposure Draft revolutionizing hedge accounting. Though its exact wording has not been released, the conclusions released to date ensure it will have significant impacts on the corporate hedging community.

The impacts will be different depending on the hedging strategies and instruments a corporation has in place. This is Part 2 in a series of posts highlighting the changes expected to be included in the exposure draft. Part 1 focuses on commodities; Part 3 focuses on cash flow interest rate hedging. This post is all about FX Hedges.

FX Hedges & FASB Changes: What You Need to Know

Effectiveness measurement is expected to be eliminated for companies hedging foreign currency risk. Small mismatches in timing between instrument maturity and hedged item recording will no longer be measured and accelerated into income. Instead, all changes in the derivatives will be recorded in equity in other comprehensive income until the hedged item is recorded. Ineffectiveness will show up in the P&L to the extent that the derivative doesn’t perfectly offset the hedged item.

Other expected highlights in the coming Exposure Draft:

• The elimination of retrospective and ongoing prospective effectiveness testing unless critical terms change
• The documentation of a “back-up test” in the event matched terms are no longer applicable
• Initial quantitative effectiveness testing no longer required “contemporaneously,” but by quarter end after the designation date

We also expect P&L geography changes and additional disclosures. All indications are that the hedge impact must follow the hedged item, so companies will lose the ability to choose where to book hedge gains and losses as well as the excluded time value. With the elimination of the concept of ineffective amounts, ineffectiveness disclosures will disappear and current disclosure tables are likely to be rearranged and augmented to include a discussion of quantitative objectives of the hedge program.

Above all, we would like to urge all readers to participate in the 30-60 day comment period that will begin when the Exposure Draft is issued. Traditionally, corporates have avoided commenting on pieces they agree with, writing letters only for clarification or disagreements. Unfortunately, this has sometimes resulted in positive modifications being eliminated due to lack of support. Due to the critical nature of the coming Exposure Draft, we encourage you to make your voice heard on the entire proposal – what you like, what you don’t like and what you’d like clarified.

We will continue to monitor FASB developments and post them to the Hedge Trackers blog. If you’d like to receive our FASB Updates directly in your inbox, sign up for our newsletter.