Sweeping changes may soon be in store for hedge accounting, given the strong support from constituents that a proposed amendment to current guidance has received.

The approach adopted in Exposure Draft (ED) No. 1590-100, Accounting for Hedging Activities: An Amendment of FASB Statement No. 133, would establish a fair value approach to hedge accounting. It would also eliminate many elements that exist under the current hedge accounting model, including the shortcut method and the requirement to assess a hedge's effectiveness in order to qualify for hedge accounting. FASB's proposed changes have been well received by many constituents, who have long complained about the complexity of Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities.

The proposed statement would require application of the revised hedging requirements for financial statements issued for fiscal years beginning after June 15, 2009, and interim periods within those fiscal years.

"We believe the proposed Statement would improve the usefulness of financial statements by requiring measurement of all changes in fair value of both the hedging instruments and hedged items," wrote Elizabeth Mooney, a Member of the FASB-sponsored Investor's Technical Advisory Committee.

"Moreover, the reporting of hedged financial assets and liabilities at fair value, accompanied by sufficient disclosures, would provide more insight into the alternative approaches companies take in risk management, and would provide investors with a sense of context in judging the company's hedging strategy."

The Board also received support for its decision to remove the shortcut method for hedge accounting. The method was established to simplify the calculations involved in hedge accounting and allows financial statement preparers to assume that a change in value of the swap is a perfect proxy for a change in value of the hedged item, with no income statement volatility.