The Financial Accounting Standards Board (FASB) staff issued a question and answer (Q&A) document on April 28, 2020, to address frequently asked questions about the disruptive effects of COVID-19 on cash flow hedge accounting.
The Q&A document focuses on the application of the guidance in Accounting Standards Codification Topic 815, Derivatives and Hedging, in relation to the effects of COVID-19 on cash flow hedge accounting. The responses provided in the Q&A document shouldn’t be analogized to other facts and circumstances not discussed specifically.
More details are provided below.
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.
Extenuating Circumstances Exception
Under Topic 815, if cash flow hedge accounting is discontinued, amounts deferred in AOCI should remain in AOCI unless it’s probable that the forecasted transaction won’t 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 related to the nature of the forecasted transaction and outside the control or influence of an entity, may cause the forecasted transaction to be probable of occurring at a date that’s beyond the additional two-month period. In those cases, Topic 815 provides an exception to disregard the timing restrictions and amounts deferred in AOCI should remain in AOCI until the forecasted transaction affects earnings.
The FASB staff believes the extenuating circumstances exception may be applied to delays in the timing of forecasted transactions due to the effects of the COVID-19 pandemic.
If the delay in timing of the forecasted transaction is related to COVID-19, and the forecasted transaction is probable of occurring within a reasonable time period past the two-month period, an entity should continue to defer amounts previously reported in AOCI until the hedged forecasted transaction affects earnings.
This exception can only be applied to situations in which the forecasted transaction remains probable of occurring.
If an entity determines that it’s no longer probable, amounts previously reported in AOCI should be reclassified into earnings immediately and disclosed in the entity’s interim and annual financial statements.
Under Topic 815, the derivative instrument gain or loss reported in AOCI should be reclassified into earnings when:
- It’s probable that a forecasted transaction won’t occur within the additional two-month period of time.
- The extenuating circumstances exception doesn’t apply.
An entity with a pattern of determining that hedged forecasted transactions aren’t probable of occurring would call into question both an entity’s ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions.
Given the unprecedented nature of the COVID-19 pandemic, the FASB staff believes that it’s acceptable for an entity to determine missed forecasts related to the effects of the COVID-19 pandemic shouldn’t be considered when determining whether it’s exhibited a pattern of missing forecasts.
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