What You Need to Know About the New Hedging Guidance

The new hedge accounting guidance, which is effective in the first quarter of 2019 for calendar-year PBEs, changes the way entities account for and present their hedging relationships to better portray the economics of their risk management activities in their financial statements. The extent of the changes will vary by entity because some amendments are elective. However, other amendments require entities to change their financial reporting.

Entities must apply the new presentation and disclosure requirements prospectively to all new and existing hedging relationships. These requirements are applied prospectively, which means that comparative information for periods before adoption remains unchanged. This may result in a lack of comparability for entities that historically presented amounts related to hedge ineffectiveness and excluded components in an income statement line other than where the earnings effect of the hedged item is presented (e.g., other income or expense).

In addition, entities with cash flow or net investment hedges as of the date of adoption will be required to record a cumulative-effect transition adjustment to beginning retained earnings with an offsetting adjustment to other comprehensive income (OCI). That’s because for these hedges, the new guidance requires the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness to be recorded in OCI until the hedged item affects earnings. Currently, ineffectiveness is immediately recorded in earnings. The cumulative-effect adjustment results in previously recorded ineffectiveness being reclassified to OCI as of the initial application date.
(Source: EY Financial Reporting Briefs - March 2019)