FASB Issues Accounting Standards Update on Derivatives and Hedging
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.
Related Links
Keywords: Americas, US, Banking, Accounting, Accounting Standards Update, Topic 815, Derivatives and Hedging, IFRS 9, IFRS Equivalent, Portfolio Layer Method, FASB, Subheadline
Featured Experts
Scott Dietz
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
Anna Krayn
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
Masha Muzyka
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
Previous Article
BSP Issues Multiple Updates for Financial Institutions in March 2022Next Article
ISDA Publishes Paper on Digital Regulatory ReportingRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
