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Find out how to apply FASB’s updated

hedge accounting guidance, which more
closely aligns a company’s financial

reporting with the results of its risk

management strategy.

By Mark D. Mishler, CPA

he current economic envi- entities is in 2023, including in-
ronment of rising interest terim periods. All other companies About the
Trates is hurting the financial have an additional year to comply. author
performance of companies holding Companies may early adopt if they Mark D. Mishler,
debt security investments as have already adopted ASU No. CPA, CMA, MBA,
financial assets. Financial asset 2017-12, Derivatives and Hedging is a principal at
values decrease when interest rates (Topic 815): Targeted Improvements CFO Resource
rise because the future cash flows to Accounting for Hedging Activities. Management
become discounted at a higher rate. ASU 2022-01 has both pro- in Morristown,
As a result, many companies are spective and modified retrospective N.J., and an
hedging to reduce interest rate risk application for different aspects adjunct professor
exposure (see the sidebar “Hedg- of the guidance. Prospective of accounting,
ing Basics”). These companies can application applies to designating finance, and
benefit from FASB’s new and more multiple hedged layers and hedging management
flexible hedge accounting guidance. these layers in an existing closed at Seton Hall
FASB improved its hedge portfolio. Modified retrospective University in
accounting guidance in March application applies to fair-value South Orange,
2022 when it issued Accounting basis adjustments in an existing N.J., and Rutgers
Standards Update (ASU) No. closed portfolio. This means a com- University in New
2022-01, Derivatives and Hedging pany that had previously allocated Brunswick, N.J.
(Topic 815): Fair Value Hedg- fair-value basis adjustments to
ing — Portfolio Layer Method (see individual assets for a last-of-layer
the sidebar “What ASU 2022-01 hedge in a closed portfolio would
Improves”). This update provides reverse this allocation amount
a more flexible hedge accounting through a cumulative-effect
model that more closely aligns a adjustment to the opening balance
company’s financial reporting with of retained earnings as of the ASU
the results of its risk management 2022-01 adoption date. For new
strategy. The update also simpli- disclosure guidance, companies
fied fair-value hedge accounting may elect to adopt either prospec-
for investments in debt securities. tively or retrospectively.
The income statement impact
of improved risk management PRIOR GUIDANCE FOLLOWING
and hedge accuracy is difficult to ASU 2017-12
quantify. In August 2017, FASB issued
The effective date for ASU ASU 2017-12 to improve
2022-01 for public business financial statement recognition
March 2023 | 21