Only One in Five Financial Risk Professionals Fully Comprehend FASB’s Hedge Accounting Updates

The Financial Accounting Standards Board (FASB) has issued guidance on hedge accounting that will better align accounting with the economics of strategies used by companies. The guidance is also expected to ease administrative burdens related to applying hedge accounting so more entities can take advantage of the benefits. However, a recent survey from Chatham Financial has found that only 18 percent of financial risk professionals consider themselves well-versed in what the new standard entails, indicating that most companies have yet to discover the significant benefits awaiting them in the new guidance as well as the attendant challenges of interpreting and implementing a complex accounting topic.

Chatham Financial, the global leader in financial risk management, surveyed over 500 financial risk professionals who attended an August 24^th webcast on the new guidance. Featuring experts from EY, GE, Comerica Bank, and FASB itself, the discussion focused on how the new guidance is expected to be utilized by companies in their financial risk management and accounting practices.

The final standard, which is available for immediate adoption, is designed to better align hedge accounting with the underlying economics. Hedge accounting is an elective accounting method that reduces volatility compared to mark to market accounting. By aligning economics and accounting, FASB hopes that more companies will choose to apply hedge accounting to their risk management activities.

“This has been the culmination of a 10-year project. Between our rigorous planning and evaluation, and helpful comments from end-users, we’ve created a solid set of standards that will create opportunities for companies’ hedging programs,” said Jeff Gabello, supervising project manager at FASB.

When asked what provisions of the guidance would have the biggest impact on their operations, Chatham Financial’s survey found that 71 percent of risk professionals believe that the new standards’ enhancements to fair value hedge accounting or no longer needing to separately measure and present ineffectiveness will have the greatest impact.

“Under the new standards, companies should be able to manage most risk on their balance sheets without accounting being an impediment or a challenge,” explained Muneera Carr, chief accounting officer and controller at Comerica Bank. “Beyond that, the new guidance is easier to understand and is more reflective of the economics of a transaction. It should also ease many of the administrative burdens from previous iterations.”

While there are many benefits to adopting the new standards, only 11 percent of respondents plan to early adopt the guidance. Those who choose not to early adopt will have until January 1, 2019 to implement the changes.

Respondents noted that their biggest concern regarding the new guidance is finding time to explore and adopt the new standards while juggling other initiatives. Becoming fully informed of how the changes will impact their hedging programs and making the necessary systems and/or process changes were also ranked as concerns.

“Despite the clear benefits, we’re not surprised to see that people are hesitant to early adopt the new standard,” said Aaron Cowan, executive director of corporates accounting advisory at Chatham Financial. “No one wants to be the ‘guinea pig,’ as we figure out the interpretive issues in the new guidance. Derivatives are an inherently complex topic, and with all the changes and improvements there are still many areas, some of which are newly created with these updates, that require careful judgment. That being said, for some companies the benefits of leveraging the advantageous provisions of the new guidance will outweigh those challenges. That’s why you’ll still see some companies early adopt.”

Chatham serves over 500 hedge accounting clients annually providing strategic and project advisory, full service outsourcing, and SaaS technology solutions. The hedge accounting practice is comprised of expert accountants, many with FASB and audit firm experience. The Chatham accounting advisory practice specializes in effectively applying the nuanced, highly technical interpretations of US GAAP and IFRS accounting standards to reduce financial reporting volatility for financial institutions, public and private corporations, and institutional real estate and private equity investors.