FASB expands fair value hedge accounting
Defining Issues | March 2022
Amendments to establish the portfolio-layer method for hedges of financial assets in a closed portfolio.
ASU 2022-01 establishes the portfolio-layer method, which expands an entity’s ability to achieve fair value hedge accounting for hedges of financial assets in a closed portfolio.
Applicability
ASU 2022-01, Fair Value Hedging – Portfolio Layer Method
- Entities that elect to apply the portfolio-layer method of hedge accounting in ASC 815.
Relevant dates
- March 28, 2022 – FASB issued final ASU
| Public business entitites | Other entities | |
|---|---|---|
| Annual periods – Fiscal years beginning after | December 15, 2022 | December 15, 2023 |
| Interim periods – In year of adoption | Yes | Yes |
| Early adoption permitted? | Yes. Early adoption is permitted on any date on or after the issuance of ASU 2022-01 for any entity that has adopted ASU 2017-12. | |
Key Impacts:
The ASU includes the following key provisions:
- Allows non-prepayable financial assets to be included in the closed portfolio.
- Expands the current single-layer model to allow multiple hedged layers of a single closed portfolio.
- Clarifies that fair value basis adjustments in an existing portfolio layer method hedge are maintained at the closed portfolio level (i.e. not allocated to individual assets).
- Prohibits an entity from considering fair value basis adjustments related to a portfolio-layer method hedge when estimating credit losses.
- Addresses how an entity accounts for fair value basis adjustments upon a discontinuation of a portfolio-layer method hedge.
- Allows the reclassification of held-to-maturity debt securities to available-for-sale within 30 days of the date of adoption, if certain criteria are met.
Transition requirements:
- Adjustments to the fair value basis adjustments are applied on a modified retrospective basis by recording a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
- An entity applies the guidance for designating more than one portfolio-layer method hedging relationship for a single closed portfolio on a prospective basis.
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FASB issues ASU
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Mark Northan
Partner, Dept. of Professional Practice, KPMG US
Danielle Imperiale
Managing Director, Dept. of Professional Practice, KPMG US