Dive Brief:

• The Financial Accounting Standards Board voted 7-0 Tuesday to move forward with narrower than originally planned fixes for its existing rules for hedge accounting, known as Topic 815, scheduling a 60-day comment period to obtain feedback and directing staff to draft the changes that will ultimately be put up for a final vote by a written ballot, according to a spokesperson and details of the decision on the U.S. accounting standard setter’s website. 
• The change comes nearly seven years after the FASB issued earlier targeted improvements to hedging rules under Update 2017-12, the staff said in the meeting. The board took up the proposal as corporate risk reporting grew more complex amid the retirement of LIBOR and rising interest rates.
• Despite the unanimous vote, some board members during the meeting voiced concern that the improvements to GAAP guidance did not go as far as they would have liked. “This project is really trying to take small bites at better alignment between highly effective hedging economic relationships and the resulting accounting,” FASB Vice Chair James Kroker said before casting his vote for the update. “I hope we at some point take on a broader project.” 

Dive Insight:

The board agreed in December to move ahead with a project that would in part narrow the scope of financial arrangements that are subject to accounting standards for derivatives and hedging. It was one of a number of new projects added to the FASB’s priority agenda after its 2021 stakeholder outreach, but it was not altogether new; FASB Chair Richard Jones acknowledged that it was the group’s “third swing” at the topic.

One of the complexities that caused pushback on current derivative standards is that part of the criteria includes financial arrangements that have an underlying variable that can cause the fair value of the arrangement to fluctuate, CFO Dive previously reported. For instance, litigation funding has a different value if the case that underlies the arrangement is won or lost. 

The board took another step Tuesday to formalize narrowing the change in hedged risk guidance to “apply only to hedges of cash flow variability on forecasted interest payments on choose-your-rate debt instruments,” according to a description of the votes on the website.  

FASB member Joyce Joseph supported the change, noting the new guidance is a positive step given that such debt is a prevalent instrument. “Investors will have financial statements that better reflect risk management strategies, preparers will have greater flexibility in providing information to investors…and it also brings clarity,” Joseph said in the meeting. “It sounds like a win on many fronts.”