Hedge Accounting Under US GAAP

Under US Generally Accepted Accounting Principles, companies across all sectors rely on the hedge accounting principles enshrined in Accounting Standards Codification (ASC) 815 to manage risk. However, they are often limited to using risk management tools outside of hedge accounting, due to certain prohibitions and technical complexities.

This whitepaper explores the issues faced by financial and non-financial institutions in applying hedge accounting for interest rate risk, foreign exchange risk and other risks. It highlights both the prescriptive nature of ASC 815 and the inconsistent interpretations among auditors, which together create operational burdens and can limit hedging strategies. The paper proposes potential solutions to these challenges, including the expansion of hedge eligibility and the revision of hedge accounting criteria, to allow better use of existing risk management tools.

All companies must navigate complex risks including interest rate changes, currency fluctuations and market volatility. If companies cannot apply hedge accounting to mitigate risk, this may result in financial reporting and earnings volatility that users of financial statements cannot easily discern. Effective risk management is crucial for financial stability, but existing guidance in ASC 815 prohibits the application of hedge accounting to certain hedging strategies.

The paper advocates for a holistic review of the hedge accounting framework to address these limitations, improve alignment with risk management activities and enhance the usefulness of financial statements.

Documents (1) for Hedge Accounting Under US GAAP

ISDA/IIF Responds to the PRA Consultation

On July 30th, ISDA and IIF responded to the PRA consultation (CP10/25) on enhancing banks’ and insurers’ approaches to managing climate-related risks, which proposes updates to the Supervisory Statement 3/19 on climate-related risk management for banks and insurers. ISDA and...

ISDA Board Appoints New Chair

ISDA has announced that its Board of Directors has elected Amy Hong as its new Chair. Ms. Hong is Head of Strategy, Investments and Partnerships in the Global Banking & Markets division at Goldman Sachs, responsible for leading strategic initiatives...

Response on Scope of BMR

On July 28, ISDA and the Global Foreign Exchange Division of the Global Financial Markets Association responded to the European Commission’s (EC) consultation on the need to exempt spot foreign exchange (FX) benchmarks under Article 18a of the EU Benchmarks...