Accounting Standards Update 2017-12, “Targeted Improvements to Accounting for Hedging Activities,” was issued in late August and will be effective beginning in fiscal years beginning after December 15, 2018 for publicly-traded firms. Expect that firms will want to adopt the standard early, which they are permitted to do.
Why would they choose to adopt this standard early? After all, new standards imply a learning curve and more modifications of accounting systems, with costly input from consultants. If this standard were to significantly improve profits immediately, that might be an incentive - but there’s no guarantee that will happen. What the standard really does: it simplifies much of the selection of derivatives for hedging activities, and simplifies their subsequent evaluation and accounting. That’s something that can make hedging cheaper and easier, and thus more accessible. Banks should see upticks in sales of derivative financial products: America could become “Hedge Nation” once again, just like in the mid-1990’s. One difference from that time: the basic accounting model for hedge accounting has proved to be quite rugged since its inception in 2000 - and that basic model has been left intact, except for one important disclosure.
The standard brims with guidance that, save for several new disclosures, investors will never see in the financial statements to a great degree. Yet understanding the workings of the standard and how companies may be hedging can help an investor in communications with firms. This report addresses the highlights of the standard for investors.