Standards on Derivatives and Hedging updated by FASB
The Emerging Issues Task Force of the Financial Accounting Standards Board has made an accounting standards update on the derivative contract effect about accounting relationships of the current hedge.
The Standards Codification of FASB Accounting is the main source of the influential Generally Accepted Accounting Principles (GAAP) recognized by FASB and whose application is made by non-governmental organizations. An update of the Accounting Standards is just a document communicating how the codification of accounting standards is amended; it is not authoritative. It also offers information for help a GAAP user in understanding why and how GAAP is changing and when these changes will take effect.
When it comes to novation, one party to a derivative instrument is usually replaced by another new party. According to FASB, novations of derivative instruments can happen due to several reasons including intercompany transactions and mergers of financial institutions. These novations can include a hedging instrument in a hedging relationship designed under Topic 815 in FASB Accounting Standards Codification, Hedging and Derivatives.
‘The issue at hand is if a counterparty change to a derivative instrument which has been designated as an instrument of hedging under Topic 815 results in a requirement for designating the hedging relationship and thus discontinue the hedge accounting application,’ FASB stated. The Topic 815 guidance is not crystal clear about the effect it has on a prevailing hedging relationship if any at all, and also counterparty changes to a derivative instrument designated as an instrument of hedging. Moreover, the prevailing guidance which are limited are applied and interpreted without consistency.
The standard is being updated by FASB in clarifying that counterparty changes to a derivative instrument which has been designed as an instrument of hedging under Topic 815 does not require dedesignation of that relationship as long as other hedging criteria is met.
The changes are effective for public companies financial statements that are issued for the fiscal years starting after 15th December 2016 and the interim periods within these fiscal years. For all other organizations, the amendments are effective for financial statements that are issued for the fiscal year starting 15th December 2017 and the interim periods within the fiscal years starting 15th December 2018.