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

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

Research output: Contribution to journalArticlepeer-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 languageEnglish
Pages (from-to)61-85
Number of pages25
JournalAccounting Horizons
Volume34
Issue number3
DOIs
StatePublished - Sep 2020

Bibliographical note

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

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