Fair Value Hierarchy Disclosures for Hedged Loans

Fair Value Hierarchy Disclosures for Hedged Loans

We recently received a technical accounting question from a client regarding the fair value hierarchy disclosure requirements under U.S. GAAP. The question focused on whether a hedged loan must be included in the ASC 820 fair value hierarchy disclosures when only the benchmark interest rate risk is designated in a fair value hedge.

Under ASC 820, entities are required to disclose the fair value of assets and liabilities measured on a recurring or nonrecurring basis, categorized within the fair value hierarchy (Level 1, 2, or 3). However, this requirement applies only when the entire asset or liability is measured at fair value.

In the case of a fair value hedge where only the changes in the benchmark interest rate are designated as the hedged risk, the hedged item (e.g., a fixed-rate loan) is not fully remeasured at fair value. Instead, a basis adjustment is recorded to reflect changes in fair value attributable solely to the hedged risk. This adjustment does not represent the full fair value of the loan.

As a result, the hedged loan itself is not subject to the fair value hierarchy disclosure requirements under ASC 820. Only instruments that are fully measured at fair value on the balance sheet are included in the hierarchy disclosures. The partial adjustment related to the benchmark rate does not meet this threshold.

Takeaway: If a loan is designated in a fair value hedge for only the benchmark interest rate risk, it is not required to be included in the ASC 820 fair value hierarchy disclosures. The basis adjustment does not reflect the full fair value of the loan and therefore falls outside the scope of the disclosure rules.

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Disclaimer: This post is for informational purposes only and does not constitute accounting, legal, or professional advice.

Consult a qualified professional at GLOBAL ABAS Consulting, LLC for guidance specific to your situation.

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