The Information Content of Cash Flow Hedges Under ASU 2017-12: An Ex-Post Study on Financial Reporting Usefulness

Sammanfattning

This study explores the impact of Accounting Standard Update (ASU) 2017-12, Targeted Improvements to Accounting for Hedging Activities, on the information content of cash flow hedges. Specifically, it examines the association between unrealized gains/losses on derivatives designated as cash flow hedges and future firm performance in pre- and post- adoption settings, as well as the extent to which this relationship is incorporated into stock prices. Utilizing panel data on U.S. non-financial firms from 2011 to 2022, the findings reveal that unrealized gains/losses on cash flow hedges are inversely related to future earnings both before and after the implementation of ASU 2017-12, and that the economic magnitude of this association has remained stable. However, the empirical results further suggest that this predictive relationship is not accurately reflected in stock prices under the revised hedge accounting framework. Instead, the forward-looking signals conveyed by firms' cash flow hedge gains/losses appear to be priced in only after they materialize and become observable in reported earnings. This indicates that investors' ability to interpret cash flow hedge information has weakened following the adoption of the new standard, which may reflect a decline in disclosure quality. Hence, further updates may be necessary to enhance the decision-usefulness of hedge accounting under U.S. GAAP.