IMA FRC comment letter response to proposed ASU on hedge accounting

November, 25, 2024

IMA’s Financial Reporting Committee (FRC or Committee) issued a comment letter in response to the Financial Accounting Standards Board’s (FASB or Board) Proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements (“ASU”, or “Proposal”).

The FRC agrees with and strongly supports the Board’s objective to align hedge accounting with the economics of an entity’s risk management activities. The proposed changes raised by the Board will result in an improvement to hedge accounting by allowing entities to maintain hedge accounting in more instances when the economic hedge continues to be effective. The Committee supports the proposed amendments for all five issues. The changes are clear and operable, and the Committee believes an effective date of one year after issuance would be appropriate with an option for early adoption.

The FRC raised recommendations below for each of the five issues which it believes would further achieve the Board’s objective to improve the hedge accounting guidance.

Issue 1: Similar Risk Assessment for Cash Flow Hedges
The Committee commends the Board on the proposed changes for similar risk assessment for cash flow hedges. Changing the requirement to designate a group of individual forecasted transactions from having a shared risk exposure to a similar risk exposure will help entities apply hedge accounting to more transactions that are economically hedged.

Issue 2: Hedging Forecasted Interest Payments on Choose-Your-Rate Debt Instruments
The Committee supports the proposed changes which would establish an operable model to address a pervasive hedging strategy used by corporate entities. The model would reduce the risk of hedge dedesignation events and missed forecasts consistent with the Board’s objectives.

Issue 3: Cash Flow Hedges of Nonfinancial Forecasted Transactions
The Committee supports the changes in the Proposal which would expand hedge accounting for forecasted purchases and sales of nonfinancial assets.

Issue 4: Net Written Options as Hedging Instruments
The FRC supports the proposed amendments related to Issue 4 which would make the net written option test more operable. However, the FRC believes the Board could further simplify the guidance by eliminating the net written options test in ASC 815-20-25-94.

Issue 5: Foreign-Currency-Denominated Debt Instrument as Hedging Instrument and Hedged Item (Dual Hedge)
The Committee supports the changes as they address the recognition and presentation mismatch for dual hedges resulting from the guidance in ASU 2017-12 that eliminated the separate measurement and recognition of hedge ineffectiveness. The accounting outcome for dual hedges under the Proposal would be consistent with the outcome prior to adoption of ASU 2017-12.