Today, if Company A used a derivative to guard against fluctuations in aluminum prices, it might not qualify for special hedge accounting, because the derivative couldn't protect against every financial risk posed by this contract. “If the mix changed, or the spread changed, or you hadn't accounted for changes in taxes, you would end up with ineffectiveness,” Kane explains. “There are so many components that go into a company's overall financial risk that even businesses which seem to have straightforward risks can't always get special hedge accounting.”

Under the rule changes in the exposure draft, however, Company A would qualify for special hedge accounting for derivatives purchased to mitigate its exposure to the price of aluminum. Although this change is applicable to companies engaged in any type of derivative hedging, it would likely have the largest impact on commodity hedgers. “I think this change may have come about, in part, because of all the non-GAAP reporting by commodity hedgers,” Kane speculates. “The old rules don't really invite them to play.”

Another significant change introduced in the new exposure draft is a reduction in effectiveness testing. Under the proposed rules, the initial quantitative test of hedge effectiveness at the hedge's inception is now due before quarterly financial results are reported, not within two business days. And after this initial quantitative test, the company would be required to perform only qualitative effectiveness tests at the end of each financial reporting period.

Some in the industry had hoped that businesses wouldn't be required to engage in any type of ongoing tests of hedge effectiveness. “But it's much better to go to a qualitative test after the initial quantitative test,” says Kane. “Basically, companies will just have to demonstrate that they're still paying attention. For example, in an interest rate scenario they'll have to attest regularly that they've looked at the relationship of the swap to the debt, and that the tenors are still aligned.”

The trick for corporate hedgers may be remembering to provide the appropriate initial assessments now that the timing is more flexible. “Right now, there's really a race to get initial effectiveness testing done within a two-day period,” Kane says. “I'm a little concerned people will forget to take care of it if they leave it till quarter-end.”

When it comes to changes around disclosure rules, the exposure draft would actually create more work for some corporate hedgers by requiring “added guidance on qualitative disclosure of quantitative hedging goals.” In addition, “companies have to change their tabular formats to show the impact of derivatives on specific lines in the financial statements,” Kane says. “So if you have derivatives gains and losses, and some were from currency, some from commodities, and some from interest rates—but all for some reason are hedging the revenue line—then you'll need to show each of these on a single line in the table. There aren't a lot of companies outside the financial services sector that will have to do this.”

Act Now

Now that the exposure draft is available, the ball is in corporate hedgers' court. The FASB's 75-day comment period ends November 22. Kane encourages all companies that either currently use derivatives for hedging, or are considering hedging in the future, to review the exposure draft and then let the FASB know how the proposed changes would impact the users of their financial statements.

“Often companies will comment when they are opposed to rule changes,” Kane says. “In this case, the proposed changes would provide some excellent benefits. We believe that this guidance would make special hedge accounting much more accessible to companies that have market risk but have been afraid of special hedge accounting. But without receiving that kind of feedback, the FASB might not realize the extent to which companies would benefit from these changes, and it's possible some of the favorable proposed changes wouldn't make it into the final draft.”

For corporate treasurers who are prepared to submit comments, the FASB provides an electronic feedback form. Kane cautions that commenters wanting to have the most impact should keep in mind the FASB's perspective on hedge accounting.

“The FASB is less concerned about how much work hedge accounting creates for corporate hedgers, than about the impact on users of corporate financial statements,” she says. “Treasurers who are commenting need to put themselves in the shoes of their board and their shareholders, the people who are receiving information about the effectiveness or ineffectiveness of the company's hedging relationships.”

FASB commenters should consider the materiality of numbers being reported under the current regime, versus reporting under the proposed guidelines. Commenters should also think about whether, under the current regulatory regime, their investors, board, and senior management fully understand the implications of a restatement of financials related to hedge ineffectiveness. “When Fannie Mae had to issue a restatement back in 2006, to recognize billions of dollars in losses on derivatives used to hedge interest rate risks, they obviously took a hit to their P&L,” Kane says. “But how many people reading the financial statements realized that Fannie Mae's earnings were going to look better than cash for the foreseeable future? Probably not many.

“We're hoping corporate treasurers will let the FASB know what changes to current hedge accounting rules would be meaningful for their shareholders and for internal management,” Kane says. “We're also hoping they will communicate whether—and why—some of the information that they've been tediously collecting hasn't been meaningful.”

In particular, Kane encourages corporate hedgers to provide feedback on the “questions for respondents” starting on page 8 of the exposure draft. “These are the areas in which the FASB is actively looking for input,” she says. “The questions won't all be relevant to every company. But it would be wise to determine which of these questions are applicable to your organization and provide feedback on those.”

How many comments the FASB receives, and the degree to which those comments require rethinking of some of the proposed rule changes, will determine when the final rule changes are released. Kane expects the final rules to come out sometime in 2017, perhaps in the first half of the year.

Early adopters will be able to make the switch as soon as the beginning of the next quarter after the rules are finalized, with the effective date (required implementation date) to follow. So the first companies may be using the new rules before the end of 2017.

That should be good news for corporate shareholders, managers, and treasury teams alike.