General Motors embraces hedge accounting change

General Motors stepped up its use of cash flow hedges in the first quarter after taking advantage of a change in accounting policy intended to make it easier for firms to achieve hedging recognition.

GM adopted Accounting Standards Update (ASU) Topic 815, “Targeted improvements to accounting for hedging activities”, in the three months to March 31. As a result, the carmaker said it had designated a number of foreign currency and commodity forward contracts as cash flow hedges within its Automotive division, and certain interest rate and foreign currency swaps as cash flow hedges within its Financial division.

The designations mean that the change in the fair value of these hedging derivatives only flows into the income statement when the hedged item itself affects earnings. At other times, fair value changes are excluded from earnings and reported instead in the other comprehensive loss portion of the income statement. Put simply, the designations allow the offsetting cash flows originating from the hedged item and hedging derivative to be recognised in earnings at the same time, preventing accounting mismatches that can muddy firms’ earnings reports.

GM disclosed the balance sheet impact of ASU 815 adoption together with the effects of accounting changes relating to equity investments and US tax reforms. The three changes resulted in $98 million in additional losses being reported in other comprehensive losses, and a $290 million gain in retained earnings in the quarter.

What is it?

ASU 815 was issued by the Financial Accounting Standards Board (FASB) in August 2017 to amend the hedge accounting model used by US firms. The changes are designed to make it easier for companies to apply hedge accounting in certain situations and allow them to better reflect the economics of their risk management activities in financial statements.

Among these changes, ASU 815 expands so-called component hedging – the hedging of a portion of a cash flow linked to a contractually specified interest rate – and removes the requirement for the separate measurement and reporting of hedge ineffectiveness in financial statements.

Why it matters

The FASB update was introduced in response to its constituents’ complaints that the hedge accounting model was too restrictive, and could be discouraging the use of hedging derivatives by corporates. That GM elected to adopt the new standard early, and straight away designated certain derivatives as cash flow hedges, suggests the update has successfully addressed firms’ concerns.

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