Current accounting standards permit special accounting treatment of derivatives used for hedging purposes. However, the requirement to perform periodic, retrospective assessments of hedge effectiveness and to disclose a quantitative accounting measure of hedge ineffectiveness (AMHI) for such derivatives has been controversial. In response to concerns over the compliance costs of this requirement, the FASB removed this requirement in the recently effective ASU 2017-12. However, this change was made with little empirical evidence on the benefits of retrospective effectiveness assessment and quantitative disclosure of AMHI. We document one potential benefit of this requirement to investors by providing initial evidence that a) AMHI is positively associated with an array of concurrent market- and accounting-based risk measures and b) investors react negatively to large AMHIs and related disclosures upon 10-K filings. Our findings suggest that this requirement can provide investors with risk-relevant information and shed light on its potential usefulness.
Research Article| April 22 2020
Does Mandatory Retrospective Hedge Effectiveness Assessment under ASC 815 Provide Risk-Relevant Information?
Alfred Z. Liu;
- Views Icon Views
- Share Icon Share
- Tools Icon Tools
- Search Site
Zhihong Chen, Alfred Z. Liu, Gim Seow, Hong Xie; Does Mandatory Retrospective Hedge Effectiveness Assessment under ASC 815 Provide Risk-Relevant Information?. Accounting Horizons doi: https://doi.org/10.2308/horizons-17-065
Download citation file: