Accounting 

The Effects of COVID-19 Pandemic on Cash Flow Hedge Accounting

In April 2020, the Financial Accounting Standards Board (FASB) issued FASB staff question-and-answer document (Q&A) focused on the application of the guidance in Topic 815, Derivatives and Hedging, in relation to the effects of the COVID-19 pandemic on cash flow hedge accounting.

Topic 815 provides guidance on when to discontinue cash flow hedge accounting and when and how to reclassify amounts deferred in accumulated other comprehensive income (AOCI) to earnings. FASB staff has developed the Q&A to respond to two frequently asked questions about the disruptive effects of COVID-19 on cash flow hedge accounting.

Question 1

In accordance with paragraph 815-30-40-4, if cash flow hedge accounting is discontinued, amounts deferred in AOCI should remain in AOCI unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within a two-month period of time thereafter. In rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity may cause the forecasted transaction to be probable of occurring at a date that is beyond that additional two-month period. In those cases, amounts deferred in AOCI should remain in AOCI until the forecasted transaction affects earnings. That is, in those rare cases, an entity should disregard the timing restrictions otherwise applicable to the forecasted transaction and continue to defer amounts previously reported in AOCI until the forecasted transaction affects earnings.

When cash flow hedge accounting has been discontinued, may delays in the timing of the forecasted transactions related to the effects of the COVID-19 pandemic be considered rare cases caused by extenuating circumstances outside the control or influence of an entity?

Answer

The FASB staff believes that an entity may apply the exception in paragraph 815-30-40-4 for rare cases caused by extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of an entity to delays in the timing of the forecasted transactions if those delays are related to the effects of the COVID-19 pandemic. That determination will require judgment based on facts and circumstances. Consequently, for affected dedesignated hedges, if the forecasted transaction is probable of occurring after the additional two-month period, an entity should continue to retain amounts previously reported in AOCI associated with that forecasted transaction until that forecasted transaction affects earnings. However, that exception only applies to situations in which the forecasted transaction remains probable of occurring. When applying the exception, an entity should consider whether the forecasted transaction remains probable over a time period that is reasonable given the nature of the entity’s business, the nature of the forecasted transaction, and the magnitude of the disruption to the entity’s business related to the effects of the COVID-19 pandemic. If an entity determines that it is no longer probable that the forecasted transaction will occur within that reasonable time period beyond the additional two-month period, that exception would not apply and amounts previously reported in AOCI should be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.

Question 2

Paragraph 815-30-40-5 states that a pattern of determining that forecasted transactions are probable of not occurring would call into question an entity’s ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions.

If an entity determines that amounts deferred in AOCI should be reclassified to earnings in accordance with paragraph 815-30-40-5 because of missed forecasts related to the effects of the COVID-19 pandemic, should those missed forecasts be considered when determining whether the entity has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions?

Answer

Given the unprecedented nature of the pandemic, the FASB staff believes that it would be acceptable for an entity to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. The FASB staff believes that this guidance did not contemplate forecasts changing so rapidly as a result of a pandemic. Determining whether the missed forecast is related to the effects of the COVID-19 pandemic will require judgment based on facts and circumstances. If an entity determines that a missed forecast is related to the effects of the COVID-19 pandemic, the entity would continue to account for those missed forecasts in accordance with paragraph 815-30-40-5 and disclose the associated amounts in accordance with paragraph 815-10-50-4C(f) (if the entity has adopted the amendments in Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities) or paragraph 815-30-50-1(e) (if the entity has not yet adopted the amendments in that Update).

Source: www.fasb.org

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