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 those with exposure to commodities markets. The new standards are expected to make it more viable for producers and consumers to apply hedge accounting to derivatives being used to hedge commodity and/or raw material exposure.
The changes to the standard that are most relevant to the market include the following:
1. For hedges of non-financial items, entities will now be able to designate the hedged item as any contractually specified component or ingredient linked to an observable index.
a. The emphasis here is to have said index specified within an entity’s contract(s) to be able to designate the component in a hedge relationship.
2. The change in fair value will no longer be split between effective and ineffective portions, provided the relationship meets the highly effective requirements.
a. For a fair value hedge, changes in the derivative’s fair value would be recorded on the same income statement line item as the hedged item (for example, raw material purchases).
b. For a cash flow hedge, the changes in the derivative’s fair value would be recorded in Other Comprehensive Income, and would be reclassified to the same income statement line item as the hedged item (when that hedged item affects earnings).
Together, these two changes are expected to provide entities greater access and flexibility in their hedging programs, as well as improve the alignment of accounting with the economic results of their risk management activities.
For entities looking to take advantage of these new rulings, the ASU will take effect for fiscal years starting after Dec. 15, 2018, for public companies and for fiscal years beginning after Dec. 15, 2019 for private companies. All entities may early adopt the ASU in any interim or annual period after its anticipated issuance in August 2017.
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Tim Potter, CPA
Hedge Accounting Manager
Heidi Lindahl - Marketing Manager