Early evidence of the effect of ASU 2017‐12 on derivative disclosure compliance

Abstract

The growth in the use of financial derivatives for a variety of purposes has caused increased complexity in derivative reporting standards. As such, financial statement users have asked the Financial Accounting Standards Board to update guidance to increase transparency while preparers seek clearer guidance on the application of standards and a broadened scope of hedge accounting. The most recent derivative accounting guidance update, ASU 2017‐12 (Topic 815), broadens instruments that qualify for hedge accounting, expands allowable hedge accounting techniques, and reduces reporting requirements by omitting the reporting of hedge ineffectiveness. While these changes might simplify reporting requirements, there is the risk that the omitted disclosure would have been relevant to investors’ decision‐making. In this paper, we examine how derivative disclosure practices changed following the implementation of ASU 2017‐12. Using a hand‐collected sample of twenty S&P 500 firms, we calculate a derivative disclosure compliance (DDC) score and find that, on average, DDC scores decreased following firm adoption of ASU 2017‐12. This decline was realized for firms regardless of the notional amounts of derivative instruments held. However, the decline was not significant for early adopting firms suggesting a motivation for completeness by select firms. Our initial findings indicate that the update on derivative disclosures is not being uniformly applied potentially lessening its value to users. As a result, further updates may be necessary.

The impact of cash flow hedge accounting on future profitability and stock returns: a country comparison

“…Recent studies have found that SFAS 161 disclosures resulted in less asymmetry of information for investors (Steffen, 2022), an increase in stock liquidity (Chen, Dou, & Zou, 2021), and a better user understanding of the effects of derivative and hedging operations on future firm performance, and less mispricing by investors (Campbell, Khan, & Pierce, 2021). Troyer, Johnston, and Trimble (2023) find that derivative disclosure practices decreased after the implementation of ASU 2017-12 (Topic 815). This standard update aims to better align hedge accounting with an organization's risk management activities in terms of its financial statements.…”