The FASB has issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. ASU 2022-01 relates to changes to fair value hedging for entities that apply the portfolio layer method (formerly referred to as the last-of-layer method). Under previous hedging accounting guidance, prepayment risk is not incorporated into the measurement of a hedged layer utilizing the last-of-layer method, which was added by ASU 2017-12. Constituents expressed concern over the last-of-layer method in relation to the utilization of single-layer strategies or multiple-layer strategies and the need to clarify what types of hedging instruments are permitted in single-layer and multiple-layer strategies. Constituents also expressed concern of how to account for and disclose fair value hedge basis adjustments during an existing last-of-layer hedge and how last-of-layer fair value hedge basis adjustments interact with the guidance on credit losses.
The amendments help address these concerns raised by constituents by doing the following:
Expanding the current single-layer model to allow multiple-layer hedges of a single closed portfolio. The last-of-layer method is renamed the portfolio layer method
Expanding the scope of the portfolio layer method to include nonprepayable financial assets
Specifying that eligible hedging instruments in a single-layer strategy may include spot-starting or forward-starting constant-notional swaps, or spot-starting or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated
Providing additional guidance on the accounting for and disclosure of fair value hedge basis adjustments that would be applicable to both current single-layer model and the proposed multiple-layer model
Indicating how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio
For public business entities, this amendment is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those years. Early adoption is permitted for any entity that wishes to do so as long as the entity adopts the provisions of ASU 2017-12 as well in the corresponding period.
The FASB has indicated that any entity wishing to adopt a multiple-layer hedge strategy of a single closed portfolio would be able to do so on a prospective basis upon adoption. All entities would be required to apply the proposed amendments related to fair value hedge basis adjustments under the portfolio layer method, except for those related to disclosures, on a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. Entities can elect to apply the amendments related to disclosures on a prospective basis or on a retrospective basis to each prior period presented after the date of adoption of the amendments in ASU 2017-12.
The full text of ASU 2022-01 is available here.
Readers should not act upon information presented without individual professional consultation.