What you should know about hedge accounting

Some entities mitigate certain risks by entering into separate contracts that meet the definition of a derivative instrument. For such circumstances, ASC 815 allows entities to use a specialized hedge accounting for qualified hedging relationships.

If hedge accounting is not applied, changes in the fair values of derivative instruments are recognized in earnings in each reporting period, which may or may not match the period in which the risks that are being hedged affect earnings. Therefore, the objective of hedge accounting is to match the timing of income statement recognition of the effects of the hedging instrument with the timing of recognition of the hedged risk.

Changing Lanes

ASU 2017-12 added the “last-of-layer” method to ASC 815, which enables an entity to apply fair value hedging to closed portfolios of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. In March 2022, the FASB issued ASU 2022-01, which expands the current single-layer model to allow multiple-layer hedges of a single closed portfolio of financial assets under this method. The last-of-layer method is renamed the “portfolio layer method” to reflect this change.

On the horizon

On September 25, 2024, the FASB issued a proposed ASU that would make targeted improvements to hedge accounting. Comments were due on November 25, 2024. As of the date of this publication, the proposed ASU has not been finalized.

Continue your hedge accounting learning

Deloitte’s Roadmap Hedge Accounting provides an overview of the FASB’s authoritative guidance on hedge accounting as well as our insights into and interpretations of how to apply that guidance in practice. For guidance on the identification, classification, measurement, and presentation and disclosure of derivative instruments, including embedded derivatives, see Deloitte’s Roadmap Derivatives.