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    ISDA Responds to FASB Proposal on Derivatives and Hedging Standard

    January 22, 2020

    ISDA published its response to the FASB’s proposed Accounting Standards Update on derivatives and hedging (Topic 815). In its response, ISDA supports the efforts of FASB to clarify and improve the US Generally Accepted Accounting Principles (GAAP) applicable to hedging activities. However, the ISDA response suggests the need for improvements via a phase-two hedge improvements project, including changes related to the hedged risk in a cash flow hedge.

    While the FASB efforts to provide clarification on certain matters in the proposed Update is appreciated, ISDA encourages FASB to add a phase-two targeted hedge accounting improvements project to its agenda. ISDA believes that such project could address certain practice issues and other matters that remain unresolved or have arisen since the issuance of Accounting Standards Update 2017-12 on targeted improvements to accounting for hedging activities under Topic 815, which would be more than technical corrections.

    Additionally, ISDA believes certain changes are needed for with respect to Issue 1 in the proposed Accounting Standards Update, which will provide clarification for preparers for certain topics included in Accounting Standards Update No. 2017-12. The amendments in this proposed Update have been classified under four issues.

    • Issue 1 is related to changes in hedged risk in a cash flow hedge.
    • Issue 2 is related to contractually specified components in cash flow hedges of non-financial forecasted transactions.
    • Issue 3 is related to foreign-currency-denominated debt instrument as hedging instrument and hedged item (Dual Hedge).
    • Issue 4 is related to using the term prepayable under the shortcut method. 

    ISDA agrees with the proposed Update on Issues 2, 3, and 4 and does not have any specific comments in relation to those Issues. With respect to Issue 1, the ISDA members believe certain changes to the proposed Update will make it more operable, including an improvement to the existing Topic 815 guidance related to a change in hedged risk within a designated hedging relationship. 

     

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    Keywords: Americas, US, Banking, Accounting, Accounting Standards Update, Derivatives and Hedging, Hedge Accounting, Topic 815, FASB, ISDA

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