Accounting & Auditing | Business and Industry | Legislative & Regulatory

FASB issues hedging standard; SEC updates rev rec guidance

Earlier today, the Financial Accounting Standards Board issued the long-awaited update to its hedging standards. Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, is aimed at simplifying and improving existing guidance in U.S. generally accepted accounting principles (GAAP) established by the FASB.

Highlights from hedging standard According to the FASB, the new guidance:

  • Eliminates the separate measurement and reporting of hedge ineffectiveness.
  • Allows more risk components to qualify for hedge accounting such as the variability in cash flows attributable to change in a contractually specified component of a forecasted purchase or sale of a nonfinancial asset or the contractually specified interest rate of a variable-rate financial instrument.
  • Permits an entity to recognize in earnings the initial value of amounts excluded from the assessment of effectiveness using a systematic and rational method over the life of the hedging instrument.
  • Aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s risk management activities. An entity is now required to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported.
  • Amends existing income statement disclosures to focus on the effects of hedge accounting on individual income statement line items.
  • Allows an entity to perform subsequent assessments of hedge effectiveness qualitatively for instances in which initial quantitative testing is required.
  • Allows an entity to assume that the hedging derivative matures at the same time as the forecasted transactions if both the derivative maturity and the forecasted transactions occur within the same 31-day period or fiscal month for purposes of evaluating the qualifying criteria for the critical terms match method.
  • Allows an entity to document a long-haul method of assessing effectiveness at hedge inception that the entity may use if it determines that use of the shortcut method was not or no longer is appropriate.

The  new hedging standard generally becomes effective in 2019 for public companies ("public business entities"), and 2020 for private companies. Read more in FASB's overview of the hedging standard, and in this FASB in Focus.See also FASB's video on the new hedging standard.

SEC updates rev rec guidance In other financial reporting-related news, the U.S. Securities and Exchange Commission recently released an update to its long-standing guidance on revenue recognition that had been articulated in SEC Staff Accounting Bulletin No. 101 (SAB 101).

According to the SEC, the update, issued as Staff Accounting Bulletin No. 116:

brings existing SEC staff guidance into conformity with the Financial Accounting Standard Board's adoption of and amendments to ASC Topic 606. The SAB modifies SAB Topic 13, Revenue Recognition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure.

As to effective date, SAB 116 becomes effective "upon a registrant's adoption of ASC Topic 606," i.e. when a company adopts the FASB's new rev rec standard. Prior to adopting FASB's new rev rec standard, the SEC states that prior SEC staff guidance (prior to SAB 116) should be followed.

In addition to SAB 116, the SEC also issued two interpretive releases relating to particular rev rec matters, to conform to FASB's new rev rec standard:

Learn more The MACPA has numerous educational programs this fall on FASB's new rev rec standard - including Interpreting the New Revenue Recognition Standard: What All CPAs Need to Know (half-day webcast, choose Sept. 5, Oct. 27, Nov. 29 or Dec. 27, or half-day in-person Nov. 15); and Revenue Recognition: Mastering the New FASB Requirements (full day webcast, choose Sept. 5, Oct. 12, Nov. 28 or Dec. 26, or full-day in-person on Oct. 27)l.


Edith Orenstein