This week’s GAAP Flash includes articles about the status of the FASB’s hedge accounting proposed changes, the Dodd-Frank Act, going-concern, and impacts related to FX volatility.

FASB Proposal Looks to Trim ‘Hedge Accounting’ Requirements (March 27, 2017) – Wall Street Journal (@WSJ)

The Financial Accounting Standards Board is in the later stage of their exposure draft redeliberations on new guidance for accounting for hedging activities. Under current GAAP, there are strict requirements to qualify for special hedge accounting which “typically results in less volatile earnings quarter to quarter.” The new guidance is expected to be less burdensome and onerous for an entity to qualify for hedge accounting.

How It’s Relevant:

Current GAAP provides special accounting for hedging activities to address differences in accounting for hedging instruments and hedged items or transactions. Initially, the FASB sought to overhaul the hedge accounting guidance but over time has chosen instead to focus on targeted improvements to the hedge accounting model. The proposed updates aim to simplify the application of the hedge accounting guidance in current GAAP and improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The FASB is getting closer to completion with final guidance expected later this year. Hedge accounting is Phase 3, the final phase, of the FASB’s Financial Instruments project. The FASB issued guidance on the Classification and Measurement phase in January of 2016 and issued guidance on the Impairment phase in June 2016.

Trump SEC Pick Says He Has No ‘Specific’ Plans to Gut Dodd-Frank (March 23, 2017) – Bloomberg (@Bloomberg)

Jay Clayton, a lawyer and partner at Sullivan & Cromwell, is President Donald Trump’s top pick for Chairman of the Securities and Exchange Commission. According to the article, “The finance industry expects Clayton to play a key role in…going after Dodd-Frank.” However, during his Senate confirmation hearing, Clayton indicated that while he believes Dodd-Frank should be looked at, he has no specific plans for an overhaul of Dodd-Frank legislation.

How It’s Relevant:

The Dodd-Frank Act was signed into law by President Obama on July 21, 2010. It was created as a result of the recession of the late 2000’s and has brought significant changes to financial regulation in the U.S. The legislation mandated by the Dodd-Frank Act has far reaching impacts, includes approximately 390 rules, and has dominated the SEC’s agenda over the years. The new administration has indicated that they are interested in repealing or, at a minimum, scaling back regulation, and have specifically targeted the Dodd-Frank Act, although no action has yet been taken.

Why Sears, But Not Its Auditor, Gave a Going-Concern Warning (March 22, 2017) – MarketWatch (@MarketWatch)

In its latest annual report, Sears Holdings Corporation disclosed that “its past operating results point to substantial doubt that the company can continue as a going concern. While the company has raised the going concern flag, Sears’ independent auditor did not mention any going concern issues in their audit opinion.

How It’s Relevant:

The FASB issued ASU 2014-15 in August 2014, addressing management’s responsibilities with respect to going concern. ASU 2014-15 provided an explicit requirement for management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern. Auditing Standards mandated by the Public Company Accounting Oversight Board (PCAOB) require the auditor to separately conclude whether there is substantial doubt about an entity’s ability to continue as a going concern. Since there are separate requirements for independent evaluations and conclusions by auditors and companies, it is possible that different conclusions could be reached.

Currency Turmoil, Price, and Profit in Global Markets (March 1, 2017) – Journal of Accountancy (@AICPA_JofA)

In our current economic environment of volatility in currency exchange rates, companies need to strategically manage their foreign currency risk exposures. This article provides a scenario that depicts how volatility in exchange rates can impact the profitability of a company. It further elaborates on the need for multinational companies to have a foreign currency risk management strategy and policies to address or manage foreign currency risk.

How It’s Relevant:

FX volatility presents risks and challenges for multinational businesses. Companies need to stay abreast of changes in the foreign currency markets and understand how fluctuations in currency rates impact their financial statements. As the article indicates, it is critical for an entity to have a risk management policy that includes strategies to address exposure to foreign currency risk utilizing “natural” or economic hedging strategies or qualifying Topic 815 hedging strategies to manage this risk.

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