ACCTFAX Summer 2021 Bulletin Board

Published July 14, 2021 By Phil Miller, CPA; Greg Taylor, MBA, CPA, CVA; Bill Erlenbush, CPA

Originally published in The Cooperative Accountant, Summer 2021 Issue

On May 5, 2021, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) intended to better align hedge accounting with an organization’s risk management strategies. Stakeholders are encouraged to review and provide comment on the proposed ASU by July 5, 2021.

In 2017, the FASB issued a new hedging standard to better align the economic results of risk management activities with hedge accounting. The new standard increased transparency around how the results of hedging activities are presented, both on the face of the financial statements and in the footnotes, for investors and analysts when hedge accounting is applied.

One of the major provisions of that standard was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgaged-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows.

Since issuing the hedging standard, stakeholders have told the FASB that the ability to elect hedge accounting for a single layer is useful, but hedge accounting could better reflect risk management activities if expanded to allow multiple layers of a single closed portfolio to be hedged under the method.

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