AICPA Panels React to FASB’s Targeted Improvements to Accounting for Hedging Activities

The American Institute of CPA’s (AICPA) Financial Reporting Executive Committee (FinREC) and the Private Company Practice Section (PCPS) Technical Issues Committee (TIC) have written the Financial Accounting Standards Board (FASB) regarding FASB’s targeted improvements to accounting for hedging activities. 

The comment letters were submitted in response to FASB’s Proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.

FinREC’s letter, signed by FinREC Chairman James Dolinar and Financial Instruments Task Force Chairwoman Linda Bergen, noted that, “The current hedging standard can be challenging for reporting entities to apply properly. Achieving hedge accounting for financial and nonfinancial risks under the current guidance has also proven to be very challenging.”

FASB issued a proposed ASU in 2010 that attempted to address constituents’ concerns.  FinREC’s response, in a comment letter dated September 10, 2010, expressed support for provisions that:

• would have continued to allow hedge designation by type of risk;
• allowed hedges to be reasonably effective rather than highly effective; and
• also would have permitted qualitative assessments to evaluate effectiveness, rather than only quantitative assessments.

“We are pleased that the current proposed ASU also includes provisions to address many of these concerns,” FinREC’s latest letter stated.  “Overall, we believe the proposal will improve and simplify the hedge accounting model, will better reflect the economics of risk management activities and will ease hedge documentation requirements.”

TIC’s letter, signed by Michael A. Westervelt, chair of TIC, stated that “TIC agrees with the objectives of this ED [Exposure Draft], which are to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements.  In addition to that main objective, the amendments in this ED would make certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP based on the feedback received from preparers, auditors, users, and other stakeholders.”

The letter noted, however, that “TIC believes that the initial quantitative effectiveness testing portion and related quarterly documentation requirements add undue cost and complexity for entities that only prepare financial statements on an annual basis.”  TIC provided detailed feedback to 10 specific questions posed in the ED.

Both FinREC and TIC recommended that the effective date should be delayed one year for entities other than public business entities.  They also each supported having the Private Company Council consider whether the suitable timeframe for private companies to complete the initial quantitative testing portion of hedge documentation should be different as part of their agenda.