FASB expands fair value hedge accounting

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

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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