FASB proposes targeted improvements to hedge accounting

The Financial Accounting Standards Board (FASB or the Board) recently issued Proposed Accounting Standards Update, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Interest Rate Risk Hedging and Net Investment Hedging (the proposed ASU), to better reflect the economics of an entity’s risk management activities in its financial statements and to enhance the operability of hedge accounting.

Main provisions

The amendments in the proposed ASU would affect the following:

• Hedging interest rate risk for held-to-maturity (HTM) debt securities. The proposed ASU would permit entities to designate interest rate risk related to HTM debt securities as the hedged risk in both fair value and cash flow hedges. Under current generally accepted accounting principles (GAAP), such designations are not permitted.
• Designating the Secured Overnight Financing Rate (SOFR) as a benchmark interest rate. The proposed ASU would revise the definition of the SOFR Overnight Index Swap rate in Topic 815 so that overnight SOFR is no longer the only SOFR-based benchmark interest rate. As a result, entities would be permitted to designate any tenor SOFR (e.g., one-month SOFR, three-month SOFR) as a benchmark interest rate.
• Permitting float-to-float cross-currency swaps with different reset dates to be hedging instruments in net investment hedges. The proposed ASU would expand the population of eligible net investment hedging instruments by permitting the use of certain float‑to‑float cross‑currency swaps with mismatched reset dates. Specifically, the proposal would eliminate the requirement that both legs of such swaps have identical repricing intervals and dates and instead require that repricing occur at least every six months.

Effective date

The effective date of the amendments in the proposed ASU will be determined after the Board considers stakeholder feedback. Stakeholders are encouraged to submit comments to the FASB by August 17, 2026.

Transition

The amendments would require entities to apply the guidance prospectively from the date of adoption. Early adoption would be permitted for all entities upon issuance of a final update.