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On August 28, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-12
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU help to better align an entity’s risk management activities and related financial reporting. The ASU also makes targeted simplifications to the hedge accounting application guidance.
Changes were made to address the limitations in current Generally Accepted Accounting Principles in the United States (US GAAP) on how an entity can designate the hedged risk in certain cash flow and fair value hedging relationships, as follows:
Current US GAAP contains limitations on how an entity can designate the hedged item in a fair value hedge of interest rate risk. Limitations also exist on how an entity can measure changes in fair value of the hedged item attributable to interest rate risk in certain fair value hedging relationships. The ASU addresses these limitations by permitting an entity to:
The ASU brings clarity to the financial statement presentation of the economic results of an entity’s risk management activities by requiring an entity to combine the earnings effect of both the hedging instrument and hedged item in the same income statement line item. This allows financial statement users to better understand the results and costs of an entity’s hedging program by no longer separately measuring and presenting hedge ineffectiveness. The ASU achieves this by requiring an entity to present the total fair value change of a hedging instrument included in the assessment of hedge effectiveness in:
An entity is permitted under the ASU to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. Option premiums and forward points continue to be excluded from the assessment of hedge effectiveness.
Under the ASU, the fair value changes in an excluded component are recognized using a systematic and rational method over the life of the hedging instrument. Alternatively, an entity may elect to recognize all fair value changes in an excluded component currently in earnings, consistent with current US GAAP. Such an election will need to be applied consistently to similar hedges.
The ASU provides amendments to the hedge effectiveness testing requirements as follows:
The ASU modifies disclosures required in current US GAAP, including tabular disclosures related to (i) the effect on the income statement of fair value and cash flow hedges, and (ii) cumulative basis adjustments for fair value hedges. It also eliminates the requirement to disclose the ineffective portion of the change in fair value of hedging instruments.
The amendments are to be applied only to hedging relationships existing on the date of adoption. The ASU is effective as follows:
Early adoption is permitted in any interim period after issuance of this ASU, with the initial application date being the beginning of the fiscal year in which the ASU is adopted.
A cumulative-effect adjustment arising from the elimination of the separate measurement of ineffectiveness for cash flow and net investment hedges existing at the date of adoption should be recorded in accumulated other comprehensive income. A corresponding adjustment to opening retained earnings as of the beginning of the fiscal year that an entity adopts this ASU is also required. The presentation and disclosure amendments are to be applied prospectively. Certain transition elections are available upon adoption of the amendments as described in paragraph 815-20-65-3.
To access the full script of ASU No. 2017-12, click
For more information on the financial reporting library, contact a local
MNP Assurance Professional, or
Jody MacKenzie, Director, Assurance Professional Standards.
This communication contains a general overview of the topic and is current as of August 28, 2017. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2017. All rights reserved.
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