On June 7, 2017 FASB voted to proceed with finalizing the Accounting Standard Update (ASU) with the expectation of issuing final rules in August 2017. While there are many impactful changes coming to the standard, the changes noted below are most relevant to financial institutions as a whole. The new standards are expected to make it more viable for financial institutions to apply fair value hedge accounting to derivatives being used to hedge portfolios of long-term fixed rate assets.
The changes to the standard that are most relevant to financial institutions include the following:
1. When hedging a portfolio of assets an entity will now be able to hedge a partial-term of the portfolio, effectively being able to match the time-to-maturity of the hedge and hedged item. This will eliminate the maturity mismatch between the derivative and the hedged portfolio that existed with previous fair value hedge scenarios.
2. Entities may exclude the consideration of prepayments on loans in hedged portfolios when measuring the fair value of the hedged item(s) in the portfolio.
Together, these two changes are expected to allow entities to hedge a specific notional amount of fixed rate assets over a defined term (a portfolio hedging scenario that is similar to the current cash flow hedge accounting standards).
For public entities the ASU will be effective for fiscal years beginning December 15, 2018, and interim periods within those fiscal years. For non-public business entities the ASU will be effective for fiscal years beginning after December 15, 2019, and in interim periods within fiscal years beginning after December 15, 2020. All entities may early adopt the ASU in any interim or annual period after its issuance in August 2017.
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