The IMA Financial Reporting Committee (FRC or Committee) issued a comment letter in response to FASB Proposed Accounting Standards Update (ASU) No. 2021-002, Derivatives and Hedging (Topic 815):  Fair Value Hedging—Portfolio Layer Method.  The objective of the proposed amendments in the release is to improve the last-of-layer method in the accounting for fair value hedges that was introduced to US GAAP in ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities). This 2017 standard changed the hedge accounting for closed portfolios of fixed rate prepayable financial assets (and similar beneficial interests), such as mortgage-backed securities.  If adopted, among its provisions, the proposal would:

  • Expand the application of the method from single-layer hedges to multiple-layer hedges 
  • Rename the approach from “last-of-layer method” to the “portfolio layer method”
  • Clarify the types of instruments that an entity can use for single-layer hedging strategy
  • Clarify and expand the accounting and disclosure guidance regarding fair value hedge basis adjustments under the portfolio layer method

In its response, the Committee states that it agrees with the proposed expansion of the method to multiple-layer hedges. It also agrees with clarifications regarding the types of instruments that may be used for single-layer strategies. The Committee also recommends expanding the types of closed portfolios to which the portfolio method might apply, but it did not reach consensus on how far to extend eligibility.

In addition, the Committee states that the proposal would benefit from improvements on the accounting for scenarios in which a hedge layer is breached. These improvements relate to (1) identifying which layer(s) an entity de-designates upon a breach and (2) determining whether an entity must de-designate an identified layer(s) in its entirety.