Changing the Rules: New Rules in Hedge Accounting

 New hedge accounting rules will likely impact midstream marketing agreements and increase hedging activity

By Shane Randolph, Managing Director

On Aug. 28, the Financial Accounting Standards Board (FASB), the body that creates U.S. GAAP, approved signifi cant changes to the accounting rules for derivative and hedging activities. These new rules will signifi cantly impact many midstream companies.

The new accounting rules will attract the attention of board members, prompt changes to many physical marketing agreement pricing terms, and likely increase hedging activity. In order for organizations to fully take advantage of the new rules, they must designate hedges against a contractually specifi ed component.

For example, if a company had a contractual pricing term to pay the all-in TCO (Columbia Appalachia Hub) Index price, it would need to change the contract terms to read Nymex Natural Gas Index + TCO Index in order to designate a Nymex-only hedge. The same would be true to designate the ethane component within an ethane/propane mix.  

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