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."

You may like these other stories...

Camp Hopes Estate Tax Will Be on Its Way OutAn article in Bloomberg said that Republicans are considering voting this year to repeal the U.S. estate tax, according to House Ways and Means Chairman Dave Camp (R.-Mich.). He...
Read more from Larry Perry here and in the Today's World of Audits archive.Learning "how" to audit cash is mainly learning "when" to audit cash and to "what extent" cash auditing procedures...
Senate Takes Different Approach from House for Highway and Bridge FundEarlier this week, according to a New York Times article, the Senate agreed to fill the coffers of the fund that pays for highway and bridge repairs with...

Upcoming CPE Webinars

Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.