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    FASB Issues Accounting Standards Update on Derivatives and Hedging

    March 28, 2022

    The Financial Accounting Standards Board (FASB) issued an Accounting Standards Update on derivatives and hedging (Topic 815) to expand the current single-layer method to allow multiple hedged layers of a single closed portfolio under the portfolio layer method.

    The amendments in this proposed update follow the Accounting Standards Update of August 28, 2017 in which FASB introduced the last-of-layer hedging method to make portfolio fair value hedge accounting for hedges of prepayable financial assets more accessible. 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 mortgage-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. After consultation with stakeholders, the proposed amendments were updated to reflect the expansion of the current single-layer method to allow multiple hedged layers of a single closed portfolio under the portfolio layer method (also known as the last-of-layer method). To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. Additionally, the Accounting Standards Update:

    • expands the scope of the portfolio layer method to include non-prepayable assets
    • specifies eligible hedging instruments in a single-layer hedge
    • provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method
    • specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio

    The Accounting Standards Update applies to all entities that elect to apply the portfolio layer method of hedge accounting. For public business entities, the Update is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years. For all other entities, the Accounting Standards Update is effective for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. Early adoption is permitted.

     

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    Keywords: Americas, US, Banking, Accounting, Accounting Standards Update, Topic 815, Derivatives and Hedging, IFRS 9, IFRS Equivalent, Portfolio Layer Method, FASB, Subheadline

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