FASB May Re-Open Talks on Derivatives and Hedging Activities

The Financial Accounting Standards Board (FASB) may re-start discussions on one of its most controversial standards–accounting for derivatives.

Financial Accounting Standard 133–Accounting for Derivative Instruments and Hedging Activities–took effect in 2000 and angered many business owners. Companies were required to report fair value for certain items such as derivatives and other securities on the balance sheet, and adjust earnings to reflect changes in market value.

The FASB will consider developing separate projects that will focus on issues connected with derivatives that were raised during discussions on another project, the Fair Value Measurement project.

One project would concentrate on accounting for energy-trading and risk-management contracts, which are considered derivatives, CFO.com reported.

In comments on the Fair Value Measurement project, many financial companies complained about “marking to market,” saying that market price may not always reflect creditworthiness.

"Credit standing of an entity clearly has an impact on the economic value of that entity's trading liabilities," wrote Goldman Sachs Group managing director and principal accounting officer Sarah E. Smith. "Reflecting that impact on the balance sheet results in a better fair value estimate."

Linda MacDonald, manager of the Fair Value Measurement project, told CFO.com that the board will consider whether to revisit the derivatives issue early in June. "There are a lot of issues we need to cover with that one."

Derivatives are complicated financial instruments that are being used more widely, sparking concern by Federal Reserve chairman Alan Greenspan and others.

Greenspan, in a speech last week, said that big financial players, such as banks and hedge funds that use derivatives, must always assess whether they are managing risk effectively.

"The rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress," Greenspan said. Financial players, he said, "must be aware of the risk-management challenges associated with the use of derivatives ... and they must take steps to ensure that those challenges are addressed."

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