Derivatives at Final HurdleMaybe
W hen it comes to derivatives, everyone has an opinion. The Financial Accounting Standards Board issued its exposure draft, Accounting for Derivative and Similar Financial Instruments and for Hedging Activities, in June 1996 and received many comments. The criticismsand responsesintensified when the FASB announced it was proceeding with a final statement for publication by the end of 1997.
The FASB has assembled a nearly final statement for its financial instruments task force to review, which is standard FASB procedure. However, because of the considerable interest in this statement, according to FASB Senior Project Manager Robert Wilkins, the FASB has made the document more widely available by posting it on its Web site ( http://www.fasb.org ) on August 29 and allowing an unusually long 45 daysuntil October 14for a final series of comments from task force members and any other interested parties. "Some refinement is common, and changes of any nature are possible, but we hope to have this finalized by yearend," Wilkins told the Journal. If approved, the statement would take effect January 1, 1999, for calendar-year companies.
What the statement says
The FASB original draft required all derivatives to be recognized in the financial statements and to be measured at fair value. However, some changes were made in the original ED. "Under that draft, a company would look at the overall change in the fair value of the hedged item," said Wilkins. "Now, for the purposes of determining effectiveness, companies would make the assessments looking at the changes in the fair value of the hedged item attributable to the risk being hedged. This is a significant changeand one thats responsive to what we heard during the exposure period."
Wilkins explained further: "In certain circumstances, the ED would have caused companies to recognize changes in the fair value of a hedged item caused by un hedged risks, as well as the risk that was being hedged." The board agreed that was a problem and made changes accordingly. Anyone interested in the details of the many other, smaller changes can download from the FASBs Web site a 25-page summary of changes made in the ED since January 1997.
Attack and defend
Shortly after the FASB had announced it was proceeding with the statement, a group of banks and corporations wrote to FASB Chairman Edmund Jenkins, calling for a longer, more thorough reexposure period: "the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal." Jenkins responded, saying the board was not considering reexposure and outlining the many changes already made as well as the boards ability to receive suggestions during the current 45-day final comment period. Jenkins replied, "You also state that the board has not adequately considered the proposals impact on capital markets or the difficulties that companies will have in implementing the proposals. These assertions are not correct."
Federal Reserve Chairman Alan Greenspan also wrote to the FASB, criticizing the boards proposal and suggesting one of his own: maintaining the historical cost-based framework for the primary financial statements, with some expanded disclosures. In his response, Jenkins mentioned the proposals already lengthy deliberations and declined to give the document additional exposure. He wrote, "Your approachwhen compared to ourswould reduce the information available to investors and creditors."
AICPA President Barry Melancon also issued a statement, following both the corporate and Federal Reserve letters, in defense of the FASBs role as standard setter and the deliberative process that led to the current proposal. "The technical accounting issues involved are extremely complextoo complex to be determined according to purely political pressures," he wrote.
And most recently, the chief executive officers of 13 banks wrote to Levitt and Jenkins also calling for reexposure. These CEOs criticized the exposure draft, saying, "Foremost, we object to the imposition of a fair value accounting model for hedging activities because it bears little resemblance to how banks and our customers manage the risks associated with most financial instruments."
The AICPA accounting standards executive committee had issued a comment letter on the ED and might consider another letter in this latter stage. (Meanwhile, AcSEC member Roger H. Molvar was one of the signers of the corporate letter to the FASB in his capacity as controller of the Times Mirror Company.)
A good source of up-to-the-minute information on this topic is the FASB World Wide Web site, which has been promptly posting relevant public documents.