Accounting & DisclosureFX

Talking Shop: Disclosing Option Premium Expenses in Revenues

By September 15, 2020 No Comments

Context: In 2017, the FASB issued ASU 2017-12, which simplified and expanded the eligible hedging strategies for financial and nonfinancial risks.

  • The update goes into effect for all corporates this year, and some NeuGroup Members recently collaborated to share their approach to updated guidance on disclosing option premium expenses in their revenues.

Question: “Does anyone disclose option premium expense in their revenues due to ASU 2017-12?”

  • “As a consequence of the revised accounting for hedge costs under ASU 2017-12, our company is reviewing our typical script for option impact. Previously, we reported option premium expense to OiOE (other income/other expenses) but now it goes to revenue. Thus, our ‘script’ is no longer applicable.”

Peer answer 1: “We don’t directly call out option premium expense in the 10Q/K, but it’s embedded in the hedge results in the I/S line we’re hedging, e.g., revenue or expense.”

Peer answer 2: “Here, it has been long-standing practice to realize the premiums in our revenues. I don’t think we disclose the premiums anywhere.

  • “I recall all of our disclosed amounts represent a net gain/loss across applicable positions (e.g., disclosing one number for all securities maturing, which would be a mix of options and forwards across multiple currencies, with no further breakdown).”

Expert opinion: NeuGroup Insights reached out to hedge accounting expert Rob Baer, head of derivative accounting at Derivative Path. He said that from a rates perspective, his company sees disclosure of fair market value (FMV) and notional, but not premium.

  • “Typically we don’t see premium cost as a disclosure item,” he said.  “However, under the new hedge accounting rules, we see most clients exclude premium from the effectiveness assessment and amortize it straight line (the most common systematic and rational method).”
  • Other analysis: “To some extent, the premium might be disclosed when stating amounts excluded from hedge effectiveness assessments.”
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Justin Jones

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