March 09 2018
Some companies have opted to early adopt the new hedge accounting standard, particularly banks, even though they’re still dealing with other new accounting standards.
The Financial Accounting Standards Board issued its hedging standard last August, making it effective for public companies in 2019 and private companies in 2020, but also allowing for early adoption. The standard refines and expands hedge accounting for both financial risks, such as interest rates, and commodity risks. The goal was to create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes, for investors and analysts. Many public companies are still trying to adjust to the new revenue recognition standard that took effect in December and the leasing standard that takes effect at the end of this year, not to mention the credit loss standard that’s set to take effect at the end of 2019. The hedging standard might seem almost like an extra burden, but it actually makes life easier for some companies, particularly multinationals, and comes with certain financial benefits.
“Most people felt like this standard was going to be a really big deal for the banks and just for the banks, but we’ve actually had a lot of activity with multinationals across industries,” said Jon Howard, a senior consultation partner at Deloitte. “If they have subsidiaries in Europe, Great Britain or Japan, right now the timing is right for some of the derivative products as far as pricing that they can get because of the cross-currency basis spread, and the difference in interest rates overseas versus here. With forwards and cross-currency interest rate spreads, the pricing is just good if you’re a U.S. company trying to hedge your subsidiary overseas. You’re basically going to be on the receiving end of net interest payments on the swap, or the forward rates are lower than today’s current exchange rates just because of those factors.”
In addition to the advantageous timing, FASB also made some attractive changes to how companies can account for net investment hedges.
The changes made in the accounting standards update eliminate some of volatility of changes in the cross-currency spread.
Not only banks are early adopting the new standard, but Howard also sees some early adoption in global manufacturing, retail and high-tech companies.
Even though there’s a glut of major accounting standards taking effect over the next few years, he believes the hedging standard is one to consider using a little ahead of time.
The credit loss standard is also one that many banks and financial services firms are preparing to adopt.
However, companies should be aware they do have some one-time elections they will have to make whenever they decide to adopt the hedging standard.