Defining Issues | March 2022

 

Insight

FASB expands fair value hedge accounting

Amendments to establish the portfolio-layer method for hedges of financial assets in a closed portfolio.

Mark Northan

Mark Northan

Partner, Dept. of Professional Practice, KPMG US

+1 212-954-6927

Danielle Imperiale

Danielle Imperiale

Executive Director, Dept. of Professional Practice, KPMG US

+1 212-954-3866

Daniel Jones

Daniel Jones

Senior Manager, Dept. of Professional Practice, KPMG US

+1 267-256-7003

ASU 2022-01 establishes the portfolio-layer method, which expands an entity’s ability to achieve fair value hedge accounting for hedges of financial assets in a closed portfolio.

Applicability

  • Entities that elect to apply the portfolio-layer method of hedge accounting in ASC 815.

Relevant dates

  • March 28, 2022 – FASB issued final ASU
  Public business entitites Other entities
Annual periods – Fiscal years beginning after December 15, 2022 December 15, 2023
Interim periods – In year of adoption Yes Yes
Early adoption permitted? Yes. Early adoption is permitted on any date on or after the issuance of ASU 2022-01 for any entity that has adopted ASU 2017-12.

 

Key impacts

The ASU includes the following key provisions:

  • Allows non-prepayable financial assets to be included in the closed portfolio.
  • Expands the current single-layer model to allow multiple hedged layers of a single closed portfolio.
  • Clarifies that fair value basis adjustments in an existing portfolio layer method hedge are maintained at the closed portfolio level (i.e. not allocated to individual assets).
  • Prohibits an entity from considering fair value basis adjustments related to a portfolio-layer method hedge when estimating credit losses.
  • Addresses how an entity accounts for fair value basis adjustments upon a discontinuation of a portfolio-layer method hedge.
  • Allows the reclassification of held-to-maturity debt securities to available-for-sale within 30 days of the date of adoption, if certain criteria are met.

Transition requirements:

  • Adjustments to the fair value basis adjustments are applied on a modified retrospective basis by recording a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption.
  • An entity applies the guidance for designating more than one portfolio-layer method hedging relationship for a single closed portfolio on a prospective basis.

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