Accounting Standards Update: 5/17/22
The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below are ASUs that were recently issued.
ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging–Portfolio Layer Method
The FASB has issued Accounting Standards Update (ASU) No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging–Portfolio Layer Method, to better align hedge accounting with an organization’s risk management strategies by expanding and clarifying the “last-of-layer” method.
ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities added the “last-of-layer” method to make portfolio fair value hedge accounting more accessible for interest rate risk hedges of portfolios of prepayable financial assets.
The last-of-layer method allows the designation of a stated amount of the assets in a closed portfolio of prepayable financial assets that are expected to be outstanding for the hedge period as a fair value hedge of interest rate risk, without consideration of prepayment risk in the measurement of the assets. Under ASU No. 2022-01, the last-of-layer method is expanded from the current single-layer method to allow multiple hedged layers of a single closed portfolio to be designated as individual hedged items. To reflect this change, the FASB renamed the last-of-layer method to the “portfolio layer” method. ASU No. 2022-01 also expands the scope of the portfolio layer method to nonprepayable financial assets.
In addition, the ASU allows flexibility in the types of derivatives that may be used by specifying that spot-starting or forward-starting constant-notional swaps or spot-starting or forward-starting amortizing-notional swaps are eligible hedging instruments in the single-layer hedge and that the number of hedged layers corresponds with the number of hedges designated.
Finally, the amendments provide additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.
Effective Date and Transition
ASU No. 2022-01 is effective for public business entities for fiscal years beginning after Dec. 15, 2022, and for all other entities for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted. Multiple-layer hedging should only be designated on a prospective basis. The ASU provides entities with the option to apply the changes related to disclosures either prospectively or retrospectively. Other amendments related to hedge basis adjustments under the portfolio layer method must be applied on a modified retrospective basis by making a cumulative-effect adjustment to the opening balance of retained earnings.
ASU No. 2022-02, Financial Instruments–Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
The FASB issued Accounting Standards Update (ASU) No. 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, to improve the usefulness of information provided to investors about certain loan refinancings, restructurings, and write-offs.
ASU No. 2016-13, Financial Instruments–Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments became effective for calendar-year public business entities, excluding Smaller Reporting Companies (SRCs), as of Jan. 1, 2020. ASU No. 2016-13 established the current expected credit loss (CECL) model, which requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. ASU No. 2022-02 was issued in response to feedback received during Post-Implementation Review (PIR) activities related to ASU No. 2016-13.
The FASB received feedback during its PIR activities questioning the relevance of the troubled debt restructuring (TDR) designation after the implementation of the CECL model, with some noting that the CECL model already incorporates losses realized from restructurings that are TDRs. For creditors that have adopted CECL, ASU No. 2022-02 eliminates the accounting guidance for TDRs in its entirety, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors made to borrowers experiencing financial difficulty. The ASU does not change the applicability of TDR accounting guidance for debtors.
In addition, numerous investors noted the disclosure of gross write-off information by year of origination (“vintage disclosures”) as essential information. Thus, ASU No. 2022-02 requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases.
Effective Date and Transition
For entities that have adopted ASU No. 2016-13, ASU No. 2022-02 is effective for fiscal years beginning after Dec. 15, 2022. For entities that have not adopted ASU No. 2016-13, ASU No. 2022-02 is effective upon adoption of ASU No. 2016-13. ASU No. 2016-13 is effective for SRCs, private companies, not-for-profit organizations, and certain employee benefit plans for fiscal years beginning after Dec. 15, 2022. Early adoption is permitted and may be elected for the amendments to TDR accounting guidance and related disclosure enhancements separately from those related to vintage disclosures.
An entity may elect to apply the changes to the recognition and measurement of TDRs using a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption, or to adopt the ASU prospectively. Regardless of this election, changes related to TDR disclosures and vintage disclosures should be applied prospectively.
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