Changes to a Derivatives Accounting Rule Sought

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A new derivatives accounting rule may be changed to reflect investor concerns. Reuters reports that the Financial Accounting Standards Board (FASB) has voted 6-1 to release a draft of Financial Accounting Standard 155 (FAS 155) with changes that exclude some mortgage-backed securities from compliance.

If approved, the changes would allow the banks, insurance companies and other market players investing in about $3.5 trillion of these mortgage-backed securities (MBS) from being required to note interest-rate-driven gains and losses on their income statements, according to Reuters.

FASB responded to requests from mortgage industry groups and other companies seeking clarification of FAS 155. They suggest that confusion on whether it would make earnings more volatile, contributed to slow sales of collateralized mortgage obligations (CMOs), according to Reuters. American International Group (AIG) and Freddie Mac were among the organizations seeking clarification. AIG is the world's largest insurer and as of June 30, 2006, held more than $362 billion in various bonds, according to the Securities and Exchange Commission.

Mike Heflin said that investors “will be overjoyed” if the changes are adopted. The changes address industry alarms in response to interpretations of FAS 155 that was approved in February. Heflin told Reuters, “It's on the fast track with a shorter comment period, so I don't think they expect any objections. It's what everyone hoped for.” Heflin is a certified public accountant (CPA) at FTN Financial Capital Markets.

The changes would also affect FASB Statement No. 133, Accounting for Derivatives Instruments and Hedging Activities, allowing companies holding these instruments not being required to account for embedded derivatives associated only with prepayment risk, according to

FASB will examine this issue again in December 2006, making the draft available for a shorter-than-normal 30-day comment period. The Board expects to adopt any final changes in early 2007.


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