Does mandatory retrospective hedge effectiveness assessment under ASC 815 provide risk-relevant information?

Zhihong Chen; Alfred Zhu Liu; Gim S. Seow; Hong Xie

doi:10.2308/horizons-17-065

Does mandatory retrospective hedge effectiveness assessment under ASC 815 provide risk-relevant information?

Zhihong Chen, Alfred Zhu Liu, Gim S. Seow, Hong Xie

Accountancy

Research output: Contribution to journal › Article › peer-review

1 Scopus citations

Abstract

SYNOPSIS: 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 (1) AMHI is positively associated with an array of concurrent market-and accounting-based risk measures and (2) 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.

Original language	English
Pages (from-to)	61-85
Number of pages	25
Journal	Accounting Horizons
Volume	34
Issue number	3
DOIs	https://doi.org/10.2308/horizons-17-065
State	Published - Sep 2020

Bibliographical note

Funding Information:
We thank Dan Collins, Haiwen Zhang, and workshop participants at the University at Albany, SUNY, the University of Connecticut, the 2011 AAA Annual Meeting in Denver, Colorado, and the 2011 CAAA Annual Meeting in Toronto, Canada for helpful comments and suggestions. We thank Thomson Financial for providing analyst forecast data through the Institutional Brokers Estimate System (I/B/E/S). Hong Xie gratefully acknowledges financial support from the Von Allmen Research Support endowment and the PwC Fellowship endowment at the University of Kentucky.

Publisher Copyright:
© 2020, American Accounting Association. All rights reserved.

Keywords

ASC 815
ASU 2017-12
Hedge effectiveness assessment
Risk relevance
Standard setting

ASJC Scopus subject areas

Accounting

Access to Document

10.2308/horizons-17-065

Cite this

@article{b1002e9ac76347db96241bb209f30585,

title = "Does mandatory retrospective hedge effectiveness assessment under ASC 815 provide risk-relevant information?",

abstract = "SYNOPSIS: 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 (1) AMHI is positively associated with an array of concurrent market-and accounting-based risk measures and (2) 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.",

keywords = "ASC 815, ASU 2017-12, Hedge effectiveness assessment, Risk relevance, Standard setting",

author = "Zhihong Chen and Liu, {Alfred Zhu} and Seow, {Gim S.} and Hong Xie",

note = "Funding Information: We thank Dan Collins, Haiwen Zhang, and workshop participants at the University at Albany, SUNY, the University of Connecticut, the 2011 AAA Annual Meeting in Denver, Colorado, and the 2011 CAAA Annual Meeting in Toronto, Canada for helpful comments and suggestions. We thank Thomson Financial for providing analyst forecast data through the Institutional Brokers Estimate System (I/B/E/S). Hong Xie gratefully acknowledges financial support from the Von Allmen Research Support endowment and the PwC Fellowship endowment at the University of Kentucky. Publisher Copyright: {\textcopyright} 2020, American Accounting Association. All rights reserved.",

year = "2020",

month = sep,

doi = "10.2308/horizons-17-065",

language = "English",

volume = "34",