FAQ on FASB Changes to Hedge Accounting Rules

The FASB has announced that the exposure draft will make “targeted improvements to the hedge accounting model.” We believe the FASB intends for the impending changes to drive an increase in the number of hedging entities that take advantage of the benefits of special hedge accounting. These would be welcome changes. If the FASB succeeds in increasing the number of corporates using hedge accounting, that should, in turn, reduce non-GAAP reporting among U.S. multinationals and increase the usefulness of those companies’ financial statements to end users of the statements.

The current rule set around hedge accounting and the diversity of interpretations by audit firms (which increases exponentially when multiplied by the number of audit partners in each firm) have combined to artificially reduce usage of hedge accounting. In fact, the hedge accounting rules have even discouraged some non-financial companies from using derivatives to manage their financial risks. The rules were designed to ensure appropriate controls and reporting on derivatives trades, but instead they’ve become a barrier to entry.