FASB Proposes Targeted Improvements to Hedge Accounting Guidance

FASB Proposes Targeted Improvements to Hedge Accounting Guidance

On June 17, 2026, FASB issued a proposed Accounting Standards Update (ASU) containing targeted improvements to hedge accounting under ASC 815, Derivatives and Hedging. The proposal is open for public comment and represents the most significant hedge accounting refinement since ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which fundamentally reformed the hedge accounting model in 2017.

Background: The Case for Further Improvement

ASU 2017-12 made major strides in aligning hedge accounting more closely with risk management activities as actually practiced. It eliminated the requirement to separately measure and report hedge ineffectiveness in earnings, simplified documentation requirements, and expanded the types of risks and hedging relationships eligible for hedge accounting treatment.

However, in the years since implementation, FASB's Emerging Issues Task Force (EITF), the Private Company Council (PCC), and stakeholders through the FASB's post-implementation review process identified a set of residual implementation challenges that the 2017 amendments did not fully resolve. The June 2026 proposed ASU is FASB's response to that feedback.

Key Areas Addressed by the Proposed ASU

1. Documentation and Formal Designation Requirements

One of the most cited pain points in hedge accounting is the rigidity of documentation requirements. Under current ASC 815, hedge documentation must be completed at hedge inception and must specify with precision the hedged item, the hedging instrument, the nature of the risk being hedged, and the method of assessing hedge effectiveness.

The proposed amendments are expected to:

• Allow certain documentation to be completed within a short window after inception for specific hedge relationship types, reducing the risk of technical disqualification due to administrative timing
• Clarify what level of specificity is required when describing the hedged risk, particularly for interest rate hedges where benchmark rates are designated
• Simplify documentation for rolling hedging programs where entities enter into a series of short-dated derivatives to hedge a longer-dated exposure

2. Effectiveness Assessment

ASC 815 requires entities to assess, both at inception and on an ongoing basis, that a hedging relationship is expected to be highly effective at offsetting changes in fair value or cash flows. The proposed ASU is expected to:

• Provide additional quantitative methods acceptable for effectiveness testing, reducing the cost of ongoing assessment for certain relationship types
• Clarify how credit risk in the hedging instrument (e.g., counterparty risk in a swap) is handled in effectiveness assessment when using the hypothetical derivative method
• Address the interaction between effectiveness assessment and the portfolio layer method introduced by ASU 2022-01

3. Portfolio Layer Method (Closed Portfolios)

ASU 2022-01 introduced the portfolio layer method, allowing entities to designate a layer of a closed portfolio of financial assets as the hedged item in a fair value hedge of interest rate risk. Since implementation, questions have arisen about:

• How to track basis adjustments when assets are prepaid or removed from the closed portfolio
• The interaction with ASC 320, Investments — Debt Securities for securities reclassified out of the available-for-sale category
• How the portfolio layer method applies to commercial banks and credit unions with large fixed-rate loan portfolios

The proposed amendments are expected to address these specific interaction issues.

4. Net Investment Hedges

For entities with foreign operations, net investment hedges under ASC 830 allow the entity to hedge the foreign currency exposure of its net investment in a foreign subsidiary. The proposed ASU is expected to clarify:

• The eligible hedging instruments for net investment hedges, including non-derivative instruments
• How basis differences between the hedging instrument and the hedged net investment are treated in the cumulative translation adjustment

Comment Period

FASB is seeking public comment on the proposed ASU. Stakeholders — including preparers, auditors, investors, and financial institutions — are encouraged to submit comment letters through the FASB website. The comment period deadline will be specified in the official exposure draft.

Who Should Respond

• Banks and financial institutions with large interest rate hedging programs
• Corporate treasury functions using cash flow hedges to fix interest rates on variable-rate debt or to hedge commodity price risk
• Multinationals with net investment hedges of foreign subsidiaries
• Audit firms whose clients face the documentation and effectiveness assessment issues described above
• Private companies that adopted the simplified hedge accounting alternative under ASC 815-20

Practical Takeaway

Entities currently applying ASC 815 should review the exposure draft carefully against their existing hedge documentation policies and effectiveness testing methodologies. If the proposed amendments would affect the qualification or accounting for existing hedging relationships, those impacts should be assessed before the standard is finalised. Comment letters are an effective way to flag implementation challenges before they become codified requirements.