At its February 14, 2018 meeting, the Financial Accounting Standards Board (FASB) met to discuss certain questions raised related to Accounting Standards Update (ASU) 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. In part, discussions focused around the definition of prepayable, given that this definition impacts (a) the financial assets that are eligible to be designated as the hedged item under a 'last-of-layer' method, and therefore, (b) the held-to-maturity securities that are eligible to be transferred to available-for-sale upon the adoption of ASU 2017-12, without penalty. (Note that an entity is not required to elect hedge accounting for a transferred security; the security just needs to qualify for the 'last-of-layer' method). The definition of prepayable also is relevant in that when hedging interest rate risk associated with a prepayable debt instrument, an entity can consider only how changes in the benchmark interest rate affect the decision to settle the instrument before its scheduled maturity when calculating its change in fair value attributable to interest rate risk.
Instruments for which the contractual maturity can only be accelerated due to credit do not meet the definition of prepayable. The Board directed the staff to research a potential technical correction related to the use of the term prepayable and announced that further information on this issue will be posted to the Hedge Accounting Implementation webpage.
Refer to the FASB's website for the complete summary of the February 14 meeting.