FASB proposes changes to hedge accounting guidance

Key impacts

The main proposals are related to cash flow hedging and are as follows:

Nonfinancial component hedges

• Permit an entity to designate a variable risk component of the forecasted purchase or sale of a nonfinancial asset if the component is clearly and closely related to the nonfinancial asset being purchased or sold.

Groups of forecasted transactions – similar risk exposure

• Allow individual forecasted transactions to be hedged in a group if they have a similar risk exposure and explicitly permit interest payments (receipts) based on different interest rate indexes in the same group.
• Provide guidance for determining whether individual transactions have similar risk exposure.

Change in hedged risk for ‘choose-your-rate’ debt instruments

• Limit the ability to change the hedged risk in a cash flow hedging relationship to hedges of interest payments (receipts) on variable-rate debt instruments with contractual terms that permit the borrower to change the interest rate index and/or tenor (‘choose-your-rate’ debt instruments).
• Provide a revised model that allows entities to continue hedge accounting even after the borrower changes to a new interest rate index and/or tenor for choose-your-rate debt instruments and to apply certain simplifying assumptions.