In 2017, the FASB added the “last-of-layer” method to its hedge accounting rules. This method expanded a company’s ability to hedge pre-payable assets in a closed portfolio, but the rule implied that only a single layer could be hedged. In addition, it only applied to a portfolio of pre-payable financial assets.

The new rule allows companies to designate hedging relationships for multiple layers in a single closed portfolio of prepayable and nonprepayable financial assets. The new method, referred to as the “portfolio layer method,” better aligns hedge accounting with risk management strategies.

The new rule also addresses the accounting for fair value basis adjustments.

For public companies, the new guidance is effective for fiscal years beginning after December 15, 2022. Private companies can defer adoption for an additional year. All companies can early adopt. The portfolio layer method is implemented prospectively. The accounting changes related to basis adjustments should be adopted via a cumulative catch-up adjustment.