Accounting, Reporting, and Compliance Hub (ARCH)

FASB Improves Hedge Accounting

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Summary

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2025-09[1], to improve hedge accounting by better reflecting the economic results of an entity’s risk management activities. The ASU affects entities that elect hedge accounting under ASC 815[2] and addresses five issues by:

• Expanding the hedged risks that are permitted to be aggregated in a group of individual forecasted transactions in a cash flow hedge.
• Facilitating cash flow hedge accounting for forecasted interest payments on variable-rate debt that allows the borrower to change the interest rate index and tenor (commonly referred as “Choose-your-rate debt instruments”).
• Clarifying and expanding hedge accounting for forecasted purchases and sales of nonfinancial assets.
• Updating hedge accounting guidance on net written options as hedging instruments for differences in the loan and swap markets after LIBOR cessation.
• Resolving the recognition and presentation mismatch in dual hedge strategies involving foreign currency-denominated debt designated as both a hedging instrument in a net investment hedge and as the hedged item in a fair value hedge of interest rate risk.

These amendments generally will allow entities to achieve and maintain hedge accounting for highly effective economic hedges of forecasted transactions.

Background

In 2017, the FASB issued ASU 2017-12[3] to align hedge accounting more closely with an entity’s risk management activities and simplify hedge accounting. Subsequently, the FASB received requests from stakeholders to clarify aspects ASU 2017-12 and to address other hedge accounting issues related to the cessation of the London Interbank Offered Rate (LIBOR). Generally, the ASU allows hedge accounting to apply more broadly and reduces the risk of hedge dedesignation events or missed forecasts.

For more information on the main provisions of this ASU, download BDO's Bulletin.

Effective Date and Transition

The following table summarizes the effective dates and transition for the ASU: 

	PUBLIC BUSINESS ENTITIES	ALL OTHER ENTITIES
Effective date	Fiscal years beginning after December 15, 2026, and interim periods within those annual periods.	Fiscal years beginning after December 15, 2027, and interim periods within those annual periods.
Early adoption	Allowed on any date on or after ASU 2025-09’s issuance.
Transition	Prospective basis for all hedging relationships. An entity is allowed to change specific critical terms of certain existing hedging relationships without dedesignating the hedge. See ASU 2025-09 for more transition requirements. An entity must disclose the nature of and reason for the change in accounting principle, as well as the method of applying the change, in both the interim reporting period and the annual reporting period that the entity adopts ASU 2025-09.

Link to ASU 2025-09

[1] Hedge Accounting Improvements

[1] Derivatives and Hedging

[1] Targeted Improvements to Accounting for Hedging Activities