Will hedge accounting guidance update allow MNCs to continue a common practice?
Well-placed sources confirm that reported changes to FASB’s new guidance on hedge accounting will not include language to make anticipated intercompany FX hedges ineligible for hedge accounting. Though hailed as very good news for hedgers, they should remain vigilant as the new guidance works its way through the standard-setting process.
Behind the scenes lobbying, including efforts to highlight how the change would go against widespread practice of hedging the FX risk on intercompany receipts and payments, has apparently convinced the FASB to let “sleeping dogs lie.” There are still board members that view the practice as contradictory to FAS 133 guidance (see paragraph 29(c)), but the strength of their convictions has been dampened by the case made that 1) there is economic risk being hedged even if the FAS 52 accounting shows a net offset upon consolidation and 2) such an impactful change would require reopening the Proposed Accounting Standards Update already out for comment to a new round of public discussion under due process. Given that derivatives and hedging are just one component of the proposed financial instruments accounting update, a delay would only further disrupt the joint project schedule with the IASB. The alternative would be to break out the hedge accounting piece for further deliberation separately.
Other priorities
To say the FASB has other priorities is also fair, given that the Codification red line is still not expected any time soon (it was originally anticipated at the end of July). The IASB appears in the same boat, since it has not yet released its exposure draft on new hedge accounting guidance. In the current environment, fair value measurement and disclosure concerns (especially reporting on credit risk) are enough to win the focus of standard-setters’ attention. Plus, there are bread and butter topics like revenue recognition and financial statement presentation on the docket.