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Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes – FASB ASU 2018-16 NEW!

Derivatives and Hedging -- FASB Discusses Benchmark Interest Rate for Hedge Accounting Purposes 

Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes - FASB Proposed ASU 2018-220 - Derivatives and Hedging (Topic 815) 

Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments - FASB ASU 2016-06 

Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships - FASB ASU 2016-05 

Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities - FASB ASU No. 2017-12 

FASB Accounting Standards Update No. 2017-11 - Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception 

FASB Accounting Standards Update No. 2016-05 - Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

FASB Accounting Standards Update No. 2014-16 - Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

FASB Proposed Accounting Standards Update 2016-310 - Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging

FASB Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments


Articles

Derivatives and Hedging (Topic 815) – Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes – FASB ASU 2018-16

Summary - The SEC has proposed rule changes designed to improve disclosure for investors about variable annuities and variable life insurance contracts. The proposal is intended to “help investors better understand these contracts' features, fees, and risks, and to more easily find the information that they need to make an informed investment decision.”

According to the SEC, the proposal would permit these contracts to use a summary prospectus to provide disclosures to investors. This document would be a concise, reader-friendly summary of key facts about the contract. More-detailed information about the contract would be available online, and an investor also could choose to have that information delivered in paper or electronic format at no charge.  

Mutual funds have been permitted to use a similar layered approach to disclosure, with investors receiving a summary prospectus, and more-detailed information available on request, since 2009.  

The public comment period will remain open through February 15, 2019.

For more information, click here.

© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Derivatives and Hedging -- FASB Discusses Benchmark Interest Rate for Hedge Accounting Purposes

As reported in its "Summary of Board Decisions" publication, the FASB met on August 29, 2018, and discussed comments received on the proposed Accounting Standards Update (ASU), Derivatives and Hedging (Topic 815): Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes. The FASB reached a number of decisions, including:

  • Confirmed its decision to add the OIS rate based on SOFR as a U.S. benchmark interest rate. The Board also indicated it plans to continue to monitor the development of the SOFR term rate and communicated that it is prepared to consider adding a SOFR term rate as a benchmark interest rate in the future.
  • Confirmed its decisions that the amendments in the final ASU should be applied on a prospective basis for qualifying new or redesignated hedging relationships entered on or after the date of adoption and that no additional disclosure should be required.
  • Retained the scope of the existing project and add a separate project to the Board’s agenda to facilitate the LIBOR to SOFR transition and mitigate the effects on financial reporting.
  • Decided to require that the effective date of this Update coincide with the effective date of Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, if an entity has not applied Update 2017-12.

For more information, click here.

© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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Inclusion of the Overnight Index Swap (OIS) Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes - FASB Proposed ASU 2018-220 - Derivatives and Hedging (Topic 815)

Summary The FASB issued a proposed Accounting Standards Update (ASU) that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting. The comment due date is March 30, 2018.
 
FASB Accounting Standards Codification® Topic 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. Among those risks is the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate (referred to as interest rate risk).
 
In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) Rate based on the Fed Funds Effective Rate, and the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate.
 
Based on concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York recently identified a broad Treasury repurchase agreement (repo) financing rate referred to as the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate.
 
The proposed ASU would add the OIS rate based on SOFR as a fifth U.S. benchmark interest rate to help companies and other organizations avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments - FASB ASU 2016-06

Summary - The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.
Effective - The amendments are effective for Public business entities for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018.
 
All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period.        
For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships - FASB ASU 2016-05

Summary - The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria remain in-tact.

Effective - The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.

For more information, click here.
 
© 2018 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities - FASB ASU No. 2017-12

Summary - The FASB has issued an Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The new standard is intended to improve and simplify accounting rules around hedge accounting. The ASU is effective for public companies in 2019 and private companies in 2020. Early adoption is permitted.
 
The new standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts.
 
The new standard takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, for public companies and for fiscal years beginning after December 15, 2019 (and interim periods for fiscal years beginning after December 15, 2020), for private companies. Early adoption is permitted in any interim period or fiscal years before the effective date of the standard.
For more information, click here.
 
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB Accounting Standards Update No. 2017-11 - Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

SummaryThe FASB has issued Accounting Standard Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. The ASU is based on recommendations from the Private Company Council (PCC).
 
Down round features are common in warrants, convertible preferred shares, and convertible debt instruments issued by private companies and development-stage public companies. Private company and other stakeholders expressed concern that current accounting guidance creates unnecessary cost and complexity for organizations that issue financial instruments with down round features by requiring, on an ongoing basis, fair value measurement of the entire instrument or conversion option. It creates, they assert, unnecessary income statement volatility associated with changes in value of a company's own share price, and does not reflect the economics of the down round feature, which exists to protect certain investors from declines in the issuer's share price under certain circumstances.
 
The new ASU addresses these concerns by requiring companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity.
 
The ASU also addresses navigational concerns within the FASB Accounting Standards Codification® related to an indefinite deferral available to private companies with mandatorily redeemable financial instruments and certain noncontrolling interests, one that created significant "pending content" in the Codification. To address this concern, the FASB decided to reclassify the indefinite deferral as a scope exception, which does not have an accounting effect.
 
The provisions of the new ASU related to down rounds are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities.
For more information, click here.
 
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB Accounting Standards Update No. 2016-05 - Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships

Summary - The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain in tact.

Effective Date - The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period.

For more information, click here.
 
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB Accounting Standards Update No. 2014-16 - Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity

Summary - The amendments in ASU 2014-16 do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.

The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features.

Effective Date - Effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption, including adoption in an interim period, is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The effects of initially adopting these amendments should be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods.

For more information, click here.
 
© 2017 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB Proposed Accounting Standards Update 2016-310 - Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging

Summary - The FASB has issued for public comment a proposed ASU, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, that would make targeted improvements to the accounting guidance for hedging activities. Stakeholders are encouraged to review and provide comment on the proposed ASU by Tuesday, November 22, 2016.
 
The proposed ASU sets forth the FASB's recommendations for improving the portrayal of the economic results of an entity's risk management activities, and for simplifying the application of hedge accounting guidance without compromising the quality of financial reporting information provided to investors.
This Exposure Draft contains proposals for improving how the economic results of an institution's risk management activities are portrayed by:

  • Expanding the use of component hedging for both nonfinancial and financial risks;
  • Refining the measurement techniques for hedged items in fair value hedges of benchmark interest rate risk;
  • Eliminating the separate measurement and reporting of hedge ineffectiveness;
  • Requiring for cash flow and net investment hedges that all changes in fair value of the hedging instrument included in the hedging relationship be deferred in other comprehensive income and released to the income statement in the period(s) when the hedged item affects earnings;
  • Requiring that changes in the fair value of hedging instruments be recorded in the same income statement line item as the earnings effect of the hedged item; and
  • Requiring enhanced disclosures to highlight the effect of hedge accounting on individual income statement line items.
Additionally, the Exposure Draft contains proposals to simplify the application of hedge accounting by:

  • Providing more time for the completion of initial quantitative assessments of hedge effectiveness;
  • Allowing subsequent assessments of hedge effectiveness to be performed on a qualitative basis when an initial quantitative test is required;
  • Clarifying the application of the critical terms match method for a group of forecasted transactions; and
  • Allowing an institution that elects the shortcut method to continue hedge accounting by using a "long-haul" method to assess hedge effectiveness if use of the shortcut method was not or no longer is appropriate after hedge inception.
To elicit additional feedback on its proposals, the FASB tentatively has scheduled two public roundtable meetings at its Norwalk, Connecticut offices on December 2, 2016. Those interested in participating in one of the roundtables are asked to submit written comments on the proposed ASU by November 4, 2016.
 
The FASB will determine an effective date for the ASU after redeliberating all comments received during the comment period and from the public round table meetings. Early application of the proposed amendments would be permitted at the beginning of any fiscal year before the effective date.
For more information, click here.
© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

FASB Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments

Summary -  The FASB has issued Accounting Standards Update No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options.  Topic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract (the "clearly and closely related" criterion).

U.S. GAAP provides specific guidance for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument meet the clearly and closely related criterion. The guidance states that for contingent call (put) options to be considered clearly and closely related, they can be indexed only to interest rates or credit risk.

The amendments clarify what steps are required when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts, which is one of the criteria for bifurcating an embedded derivative. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.

Public business entities must apply the new requirements for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. All other entities must apply the new requirements for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018.

All entities have the option of adopting the new requirements early, including adoption in an interim period. If an entity early adopts the new requirements in an interim period, it must reflect any adjustments as of the beginning of the fiscal year that includes that interim period.

For more information, click here.

© 2016 CCH Incorporated and/or its affiliates. All rights reserved. Used with permission.

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