On the Horizon: FASB discusses hedging proposal

Contents FASB posts highlights from March 22 meeting SEC adopts final rule reducing the securities transaction settlement cycle GASB       Statement 85 issued on broad range of issues
      Board forms note disclosures consultative group

FASB posts highlights from March 22 meeting All decisions reached at Board meetings are tentative and may be changed at future meetings.

The FASB met on March 22 to discuss certain issues related to a proposed ASU on hedging, as well as feedback received on a proposed ASU that addresses narrow aspects of distinguishing liabilities from equity. The Board’s actions are summarized below.

Accounting for financial instruments – hedging The Board discussed issues related to the proposed ASU, Targeted Improvements to Accounting for Hedging Activities, and tentatively decided to

  • Add a cross currency–basis spread in a currency swap to the list of components that may be excluded from assessments of hedge effectiveness (referred to as “excluded components”)
  • Allow entities to apply an amortization approach to the base recognition model for excluded components, as well as provide, as a policy election, a mark-to-market through earnings approach
  • Require that when a hedging relationship is discontinued and an amortization approach is used, an entity would release into earnings the changes in the fair value of excluded components (that were previously recorded in accumulated other comprehensive income) as follows:
      - Cash flow hedge in which the hedged forecasted transaction is still probable of occurring - When the hedged forecasted transaction affects earnings
      - Fair value hedge - Consistent with how fair value hedge-basis adjustments are recognized in earnings for the hedged item

Distinguishing liabilities from equity The Board discussed feedback from constituents received on the proposed ASU, I. Accounting for Certain Financial Instruments with Down Round Features, and 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, and took the actions summarized below.

Related to Part I of the proposal, the Board instructed the staff to perform additional research on developing a potential alternative that would affect the measurement, but not the classification, of these financial instruments.

The Board also affirmed its decision to replace the indefinite deferral in ASC 480, Distinguishing Liabilities from Equity, with a scope exception. These amendments will have no impact on how entities account for the financial instruments described in Part II of the proposal.

SEC adopts final rule reducing the securities transaction settlement cycle On March 22, the SEC adopted the Final Rule, Amendment to Securities Transaction Settlement Cycle, shortening the standard settlement cycle, from three to two business days after the trade date, for most broker-dealer transactions.

The Final Rule becomes effective 60 days after publication in the Federal Register, with a compliance date of September 5, 2017.

GASB Statement 85 issued on broad range of issues The Governmental Accounting Standards Board (GASB) issued Statement 85, Omnibus 2017, which addresses a broad range of accounting and financial reporting issues identified during the implementation and application of certain GASB pronouncements.

Issues covered by the new guidance include
  • Blending a component unit in certain circumstances
  • Reporting goodwill and negative goodwill
  • Classifying, for both operations and investment purposes, real estate held by insurance entities
  • Measuring certain investments and investment contracts at amortized cost
  • Accounting and reporting for several aspects of pension and other postemployment benefit (OPEB) arrangements

Statement 85, which applies to all state and local governments, is effective for financial statements for periods beginning after June 15, 2017 and should be applied retroactively by restating prior periods. If restatement of prior periods is not practicable, the cumulative effect of applying the new guidance should be reported as a restatement of beginning net position (or fund balance or fund net position, as applicable) for the earliest period that is restated.

Earlier application is encouraged and is permitted by topic, to the extent that all requirements associated with a single topic are implemented at the same time. Statement 85 defines the requirements that comprise single topics.

Special transition guidance should be applied to goodwill and negative goodwill balances that resulted from acquisitions prior to the effective date of Statement 69, Government Combinations and Disposals of Government Operations. The new guidance also provides relief from disclosure of certain required supplementary information for OPEBs in the 10-year schedules, if disclosure of information for all 10 years is not practicable.

Board forms note disclosures consultative group The GASB formed a consultative group to assist with the GASB’s pre-agenda research examining the effectiveness of certain note disclosure requirements. The objective of this pre-agenda research is to evaluate whether currently required note disclosures are meeting the information needs of the users of state and local government financial reports.

© 2017 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.