Is a Major Hedge Accounting Update on the Way?

Market participants waiting for years for comprehensive hedge accounting guidance may soon get their wish. The Financial Accounting Standards Board included “Risk Management and Hedge Accounting” in its January Agenda Consultation document with an invitation to comment.

Hedge accounting in financial statements describes the use of derivatives to hedge interest-rate and foreign-exchange risk.

The accounting standards body summarized past stakeholder feedback: “that the current hedge accounting model is complex, rules-based, and may no longer be suitable for its intended purpose. Stakeholders indicated that the guidance may not provide investors with decision-useful information, as many economic hedging activities do not qualify for hedge accounting because the hedge accounting guidance was not developed to broadly apply to risk management strategies that are developed and executed on an entity-wide basis.

“Therefore, stakeholders said that the guidance can result in financial statements that do not reflect the underlying economics of risk management transactions and the continued use of non-GAAP measures.”

Kern Roberts of Chatham...