The FASB has issued an Exposure Draft, requesting comment by July 5, 2021, related to potential changes to fair value hedging for entities that apply the portfolio layer method (currently referred to as the last-of-layer method). Under existing hedge accounting guidance, prepayment risk is not incorporated into the measurement of a hedged layer utilizing the last-of-layer method, which was added by ASU No. 2017-12. Constituents expressed concern over the last-of-layer method in relation to the utilization of single-layer strategies or multiple-layer strategies and the need to clarify what types of hedging instruments are permitted in single-layer and multiple-layer strategies. Constituents also expressed concern of how to account for and disclose fair value hedge basis adjustments during an existing last-of-layer hedge and how last-of-layer fair value hedge basis adjustments interact with the guidance on credit losses.

The proposed amendments would help address these concerns raised by constituents by doing the following:

1. Expanding the current single-layer model to allow multiple-layer hedges of a single closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments. The last-of-layer method would be renamed the portfolio layer method.
2. Specifying that eligible hedging instruments in a single-layer strategy may include spot-starting or forward-starting constant-notional swaps, or spot- or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated.
3. Providing additional guidance on the accounting for a disclosure of fair value hedge basis adjustments that would be applicable to both the current single-layer model and the proposed multiple-layer model.
4. Indicating how fair value hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio.

The proposed effective date has not yet been determined. The FASB has indicated that any entity wishing to adopt a multiple-layer hedge strategy would be able to do so on a prospective basis upon adoption. All entities would be required to apply the proposed amendments related to fair value hedge basis adjustments under the portfolio layer method, except for those related to disclosures required by Topics other than Topic 815, on a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. The FASB has requested respondents consider a list of 9 questions when providing comments for this Exposure Draft.

The full text of the Exposure Draft can be found here.

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