fasb's derivatives ed: some concerns about applying the proposed standard

FASB’s Derivatives ED: Some Concerns About Applying the Proposed Standard

Pamela A. Smith, Carrie Cazolas, and Curtis Norton

PamelaA. Smith, Ph.D., CPA, is an Assistant Professor of Accountancy at Northern Illinois University. C a d C a z o h , CPA, is a Division Manager in Corporate Accounting at Allstate Insurance Company. Curtis Norton, Ph.D., is the Deloitte and Touche Professor of Accountancy at Northern Illinois University. Dr. Smith and Dr. Norton have published many articles concerning the issues of derivative financial instruments, including internal control issues and industry-specific issues, as well as financial reporting and disclosure issues. Ms. Cazolas specializes in the accounting for derivative and other complex financial instruments and assists the company in refining its strategic framework for managing market risk.

There is no doubt that the sophistication of transactions and needs of financial statement users have outpaced accounting rules. The authors discuss the latest FASB exposure draft on derivatives, but also air some concerns about applying it.

he time has come. The accounting and reporting issues for derivative financial instruments and hedging activities are T being faced head on.

On June 20, 1996, the Financial Accounting Standards Board (FASB) issued an exposure draft (ED), “Accounting for Derivative and Similar Financial Instruments and for Hedging Activities.” The proposed standard is part of the financial instruments project that has been on the Board‘s agenda since 1986. The derivatives and hedging aspect of the financial instruments project stems from (1) the multiple inconsistencies and lack of guidance in the existing accounting literature and (2) the pressure from the Securities and Exchange Commission (SEC) and other user groups to improve the accounting for derivatives. Public criticism stemming from derivative losses has likely influenced the direction and increased the timing of this ED.

All of these factors have raisedvalid concerns about the appropriate application of derivative and hedging transactions and the adequacy of financial reporting. There is no doubt that the sophistication of transactions and needs of financial statement users have outpaced accounting rules. Despite the controversy surrounding derivative usage and reporting, they have become a common and effective risk management tool. The popularity of derivatives is evident in the growth in derivative trading activity over the last 15 years. There is a continuous pursuit of new derivative products and a wide use of derivatives by financial institutions and avariety of other companies.

The proposed standard goes beyond recently issued standards and addresses theaccounting anddisclosure ofderivative transactions, rather than just the disclosure of such transactions. The proposed standard is also broader in scope in that it addresses the accounting

CCC 1044-8136/96/0801043-12 Q 1996 John Wiley & Sons, Inc.

The Journal of Corporate Accounting and FinancdAutumn 1996 43

Pamela A. Smith, Carrie Cazolas, and Curtis Norton

The FASB has created a new definition of derivative that i s intended to be broad enough to accommodate both current products and the advent of new derivative products.

and disclosure of all derivative financial instruments and hedging transactions rather than just select instruments and transactions. Additionally, the definition of a derivative is broader and now encompasses financial instruments that previouslywere not included in the definition.

DEFINITION OF DERIVATIVE If you think you’re confused by what exactly a derivative is, join

the club. Many have wrestled with this definition as new financial innovations have been introduced. The FASB has created a new definition of derivative that is intended to be broad enough to accommodate both current products and the advent of new derivative products. According to the ED, a “derivative financial instrument’’ is one that either a t inception or upon occurrence of a specific event gives the holder ofthe instrument the right or obligation to participate in some or all price changes in an underlying. An “underlying” is defined as an asset, commodity, financial instrument, and so forth to which a rate, index of prices, or other market indicator is applied. A derivative does not require the holder to own or deliver the underlying. A distinguishing characteristic of a derivative according to the ED is

... that the holder can settle with only a net cash payment, either by its contractual terms or by custom, and the net cash payment is determined by reference to changes in the price of an underlying (paragraph 66).

For the first time, commodity contracts are specifically included in the definition of a derivative because it is customary to settle them in cash, therefore giving commodity contracts the distinguishing characteristic of a derivative. The definition of a derivative also includes embedded derivative financial instruments because an embedded derivative will cause a nonderivative financial instrument to behave like a derivative. The ED also applies to financial instruments that, although they may not meet the definition of a derivative, have cash flows that are based on changes in the price of an underlying in a way that exacerbates the effect of the changes. Including these items in the definition of a derivative will capture derivatives that may be ”hidden” in nonderivative financial instruments.

There are also financial instruments specifically excluded from the definition of a derivative. Contracts that require the delivery or ownership of the underlying are excluded because they are difficult to distinguish from regular purchase, sales, or insurance contracts. Regular purchase, sales, or insurance contracts are not at issue and are not covered in this ED. Insurance and reinsurance contracts are not considered derivative instruments. Financial instruments with option-like features such as callable debt or mortgages are not considered derivatives. In order for instruments with option-like features to qualify as a derivative, they must have cash flows that are

44 The Journal of Corporate Accounting and FinancdAutumn 1996


Fair value hedges are structured to hedge the change in the fair value of an asset, liability, or firm commitment.

a multiple of the changes in one or more underlying as described in the preceding paragraph. The exponential effect on a cash flow is a risk characteristic of a derivative which is intended to be captured by the definition.

If a financial instrument falls under the ED’S definition of derivative, there will be significant accounting implications. The ED requires all derivatives to be recorded on the balance sheet at fair value. All unrealized gains and losses that result from marking these instruments to market will be recorded on the income statement either as part of current-year earnings or as “other comprehensive income.” The treatment of the changes in the fair value of the derivative (also referred to as gains and losses) depends on whether the derivative qualifies as a hedge. The following section addresses the criteria that must be met to qualify as a hedge transaction and the accounting for those transactions.

HEDGE ACCOUNTING A derivative can be designated as a hedge only if certain criteria

are met. Under the ED, hedges are either (1) fair value, (2) cash flow, or (3) foreign currency exposure hedges. The accounting for the changes in the fair value of the hedged item and the derivative will depend on the hedge classification (Exhibit 1). The accounting treatment of a hedge transaction also reflects a recently issued ED, “Reporting Comprehensive Income.” The comprehensive income ED necessarily precedes the “Accounting for Derivative and Similar Financial Instruments and for Hedging Activities” ED because the comprehensive income ED addresses the placement of unrealized gains and losses in the financial statements.

Comprehensive income places nonowner changes in equity on a statement of financial performance. Comprehensive income begins with traditional net income and adds or subtracts “other comprehensive income’’ items to arrive a t comprehensive income. Currently, the items of “other comprehensive income” are the current-year effects offoreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains and losses on available- for-sale securities. The accounting for the hedge transactions discussed here is based on the premise that the ED on comprehensive income will be adopted without any substantive changes from its proposed form.

Fair Value Hedges Fair value hedges are structured to hedge the change in the fair

value of an asset, liability, or firm commitment. Fair value exposure (risk) can also be thought of as price risk. It is the risk of unfavorable changes in the price of an asset, liability, or firm commitment.

The criteria for a fair value hedge are presented in Exhibit 2. If the criteria are met, the changes in the fair value of the hedged item must be recognized in current earnings, to the extent there are offsetting changes in the fair value of the derivative. If the change in


Pamela A. Smith, C a m e Cawlas, and Curtis Norton

Designate transaction as No a hedge?

I

Exhibit 1. Designation as a Hedge and Accounting Treatment

Changes in the fair value of the derivative are recognized in current

Yes

Hedge of a fair value? I

Yes and criteria are met. (Exhibit 2)

I

1 No

Hedge of a cash flow? Yes and criteria are met. (Exhibit 3)

1 1 No

Hedge of a foreign currency transaction? criteria are met.

Yes and cash flow hedge

(Exhibit 2)

No I I

t I r I

earnings as a gain or loss.

Changes in the fair value of the derivative and hedged item are offset in current earnings.

Changes in the fair value of the derivative are recognized in comprehensive income until the projected date, then in current earnings.

Changes in the fair value of the hedging instrument are in comprehensive income as part of foreign currency translation adjustment.

Hedge of a net investment in foreign operations?

the hedged item is greater than the change in the derivative, the excess is available for offsetting derivative gains or losses in subsequent periods. If the designated hedge no longer meets the criteria of a fair value hedge or is aborted in any manner, hedge accounting shall be discontinued prospectively.

A firm commitment can be designated as a hedged item. The hedge can be designated for either the financial or nonfinancial aspect of the firm commitment. For example, a foreign currency denominated liability contains the obligation to pay the foreign currency (the financial aspect) and the right to receive a fixed asset (the nonfinancial aspect). If the financial aspect is what is hedged, it must be measured separately and compared to the hedging instrument for purposes of recognizing gains and losses in current earnings. For financial statement reporting, the hedged firm commitment should combine the financial and nonfinancial aspect together.

Yes and FAS 52 criteria are met.

Changes in the fair value of the hedging instrument are



1.

2.

3.

4.

5.

6.

7.

8.

9.

10

At inception, there must be formal documentation of the hedging instrument and hedged item. The nature of the risk being hedged must be identified.

Derivative uses must be consistent with established risk management policies.

Hedged item is specifically identified as all or a percent of an asset or liability.

Hedged item can be a single asset or liability or a portfolio of similar assets or liabilities. The portfolio of items must share similar market response characteristics so that they are expected to respond to changes in the market in a similar fashion.

The hedged item must have a reliable measure of fair value and changes in fair value. Changes in the fair value of the derivative are expected to offset the changes in the hedged item, both at inception and on an ongoing basis.

The hedged item presents an exposure that could affect reported earnings.

The derivative designated as a hedging instrument cannot be a net written option.

There must be the ability to allocate to the hedged item reserves or valuation accounts for which the hedged item is a part.

The hedged item cannot be a debt security that is classified as held to maturity, unmined oil and gas, agriculture in process (or some similar item), an intangible asset, equity method investments, mortgage servicing rights, leases, or written insurance contracts (other than financial guarantees).

At inception of the hedge, the cash flow related to the hedged item cannot be hedged as a cash flow hedge.

Exhibit 2. Criteria for Qualification as a Fair Value Hedge

1

Cash Flow Hedges Cash flow hedges are structured to hedge the variable cash flows

associated with a forecasted transaction. The criteria for a cash flow hedge are presented in Exhibit 3. If the criteria are met, the changes in the fair value of the derivative are reported as a component of other comprehensive income until the originally projected date of the forecasted transaction. The original projected date of the forecasted transaction is critical because the gains and losses accumulated in other comprehensive income are recognized in current earnings on the projected date of the forecasted transaction, whether or not the transaction actually occurs.

Hedge accounting is discontinued prospectively if the transaction is aborted or no longer meets the criteria of a hedged transaction. The


Pamela A. Smith, C a m e Caxolas, and Curtis Norton

accumulated gain or loss in other comprehensive income is still recognized in earnings on the date originally forecasted. The accumulated gain or loss in other comprehensive income is recognized immediately only when hedge accounting is discontinued because of an isolated, nonrecuming, and unusual event.

Hedge of Foreign Currency Exposure There are two types of hedges of foreign currency exposure: (1) the

hedgeofaforeigncurrencyexposurerelatedto atransactiondenominated in a currency other than the functional currency or (2) a hedge of a net investment in a foreign entity. A hedge of a transaction denominated in a foreign currency is essentially a forecasted transaction and must meet the criteria of a cash flow hedge under this ED (Exhibit 3). A hedge that is designated as a hedge of a foreign currency exposure of the net investment in a foreign entity is permitted under this ED if it meets the criteria of FAS 52, "Foreign Currency Translation."The hedge of the net investment in a foreign entity does not have to meet the criteria of a fair value hedge.

The gains and losses that arise from each of these hedges are included in the foreign currency translation adjustment component of other comprehensive income. The ED permits a nonderivative financial instrument to be the designated hedge instrument for either type of hedge of foreign currency exposure.

Exhibit 3. Criteria for Qualification as a Cash Flow Hedge

1.

2.

3.

4.

5.

6. 7.

8.

At inception, there must be formal documentation of the hedging instrument and hedged item. The nature of the risk being hedged must be identified. Details of the forecasted transaction must be very specific and identify the timing of the hedge and the hedged item involved. Derivative uses must be consistent with established risk management policies. Both at inception and on an ongoing basis, the derivative is expected to have cumulative cash flows that will substantially offset the changes in the cash flows of the hedged transaction. The projected maturity date or repricing date of the derivative is on or about the same date as the projected date of the hedged transaction. The derivative designated as a hedging instrument cannot be a net written option. The forecasted transaction must be probable, and part of an established business activity, and present an exposure to price changes that would produce variation in cash flows and could affect reported earnings. The forecasted exposure is a transaction. The forecasted transaction cannot be the acquisition of an asset or incurrence of a liability that will be measured at fair value, with changes in fair value reported in earnings. At inception of the hedge, the variable cash flows of the forecasted transaction do not relate to an asset or liability that is being hedged by a fair value hedge.



Exhibit 4. Required Disclosures

General Disclosures: Objectives for holding or issuing the instruments. Context and strategy for understanding and achieving the objectives. Face or contract amount. Distinction between derivatives designated as a fair value hedge, a cash flow hedge, a foreign currency exposure hedge, and all other derivatives.

Fair Value Hedges: Description of risk management policy, including a description of the risks hedged and derivatives used. Cumulative net unamortizedgains and losses included on the financial statements. The amount of gains and losses recognized when a hedge is discontinued. Gains and losses in current earnings on the hedged items and related derivatives and placement of these items on the income statement and balance sheet.

Cash Flow Hedges: Description of risk management policy, including a description of the forecasted transaction whose risk is hedged and derivatives used. Gains and losses in current earnings on the hedged items and related derivatives and placement of these items on the income statement and balance sheet. The reporting periods in which the forecasted transaction is expected to occur and the deferred amounts recognized in those periods. The amounts of gains and losses not recognized in current earnings and where those amounts and the related instruments are reported in the statement of performance and the balance sheet. The amount of hedging gains and losses included in other comprehensive income.

Foreign Currency Hedges: Description of risk management policy for these hedges. A description of the net investment or transaction being hedged and the instruments used to hedge. The amount of foreign currency transaction gains and losses on the hedging instrument in cumulative translation adjustment during the reporting period. The amount of changes in the fair value of the hedging derivative included in current earnings and where those gains and losses are reported.

Derivatives Not Designated as Hedges: Description of the purpose of the activity. A description of where gains and losses are reported on the financial statements. The amount of gains and losses on the derivatives during the reporting period, including aggregation by class, business activity, or other category that is consistent with the management activity.


Pamela A. Smith, C a m e Cazolas, and Curtis Norton

Only fixed-rate hedgeable items can be designated for fair value hedges and only variable-rate hedgeable items can be designated for cash flow hedges.

DISCLOSURES The disclosures required under the proposed standard are similar

to those that were required by FAS 119, “Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments” (which is now superseded by the ED). The disclosures required by FAS 119 were based on the use of the derivative: trading or other than trading. Under the ED, the disclosure is based on the hedge designation: fair value; cash flow; or foreign currency. Exhibit 4 presents a general overview of the required disclosures.

The (SEC has also proposed certain market risk disclosure requirements for publicly held companies. The SEC’s proposed disclosures would require both quantitative and qualitative disclosures of market risk and incorporate the effects of derivatives in the disclosure requirements. The section of the SEC‘s proposal pertaining to the disclosure of accounting policies for derivatives is, in substance, consistent with the disclosures proposed by the FASB in this ED.

APPLICATION ISSUES The changes proposed by the ED will no doubt affect risk

management strategies that will be undertaken in the future. The following sections present discussion and examples of concerns about the recognition and timing of gains and losses on derivatives designated as hedges, the inability to roll over futures contracts when hedging cash flows, and concerns about whether the hedge criteria and accounting reflect economic reality. First a few observations.

For the first time, all derivatives will be recorded on the financial statements. The derivatives will be recorded at fair value and changes in the fair value will be recognized. This may be problematic when only the current change in the derivative is needed in the hedge strategy, yet the full fair value of the derivative must be reflected in the financial statements.

Throughout the ED, it becomes evident that only fixed-rate hedgeable items can be designated for fair value hedges and only variable-rate hedgeable items can be designated for cash flow hedges. This categorization makes sense because intrinsically, only fixed- rate items are exposed to market valuation risk; variable-rate items are not. However, this categorization will cause problems if, and when, a hedging strategy is outside of this paradigm. For example, in some instances derivatives are used in conjunction with an on- balance-sheet financial instrument to intentionally create a financial instrument consistent with risk management objectives. In these and other instances, the hedgeable items are not easily classified into the category of a fair value or cash flow hedge.

Timing Issues Currently, many firms maintain ‘%edge accounting treatment”

because the effects of derivatives and the hedged item are “matched.” Under the current model, unrealized gains or losses on the derivative can be deferred while the position is open and then recognized over



The total gains and losses under the current and proposed models are equivalent.

the life of the hedged item. This reflects a single-transaction view of the hedge and hedged item. In this view, the derivative is intrinsically linked to the exposure created by the hedged item. It is management’s intent to hedge certain transactions, and therefore each hedge of these transactions is the result of one economic decision. The gains or losses that result from the derivative transaction are recognized over the life of the hedged transaction.

Under a two-transaction view, the decision regarding the hedged item is separate and distinct from the decision regarding the hedge. In this view, the derivative transaction is not linked to the exposure created by the hedged item and the two transactions are the result of two economic decisions. The gains or losses that result from the hedge are not considered a cost of the hedged transaction.

Example applications are presented on Exhibit 5. The current model reflects the single-transaction view. In a hedge of a forecasted transaction, the change in the fair value of the derivative is deferred until the hedge period is closed, then recognized over the life of the hedged.item. The current model reflects that the two transactions are intrinsically linked over the life of the hedged item. The proposed model reflects a two-transaction view of the same forecasted transaction. The change in the fair value of the derivative is deferred until the hedge period is closed, but is recognized in current earnings on the date the forecasted transaction was projected to occur. The proposed model does not link the two transactions over the life of the hedged item.

Overall, the total gains andlosses under the current and proposed models are equivalent. Both models defer changes in the fair value of the derivative during the hedge period. However, the proposed model will produce more volatility in earnings than the current model because deferred gains and losses will be recognized in current earnings a t the end of the hedge period. The implicit assumption of the proposed model is that the decisions regarding the hedged transaction and the derivative transaction are separate. Quite frequently, this is not true, as derivatives are often used in combination with on-balance-sheet items to synthetically create different on- balance-sheet items (e.g., derivatives are used to effectively convert floating-rate debt to fixed-rate debt, or vice versa).

Roll-Over Hedges The term “roll-over” refers to when a derivative contract is

renewed (rolled-over) in back-to-back succession (e.g., entering into two three-month contracts in succession, rather than entering into one six-month contract). Typically the roll-over derivative instrument is a futures contract and is used to hedge a forecasted transaction. When theexact date ofthe forecasted transaction cannot be estimated, the firm may use derivatives with a shorter maturity until the forecasted date can be projected with more certainty.

Under the ED, the initial derivative contract in a roll-over hedge will not qualify as a hedge because the maturity date of the initial

The Journal of Corporate Accounting and F’inancdAutumn 1996 51

Pamela A. Smith, Carrie C~zo lus , and Curtis Norton

Exhibit 5. Application Examples

Transaction

TIMING EXAMPLE: A firm plans to issue $10 million fixed-rate debt in six months. It enters into a T-bond futures contract to effectively lock in its cost of funds.

ROLLOVER EXAMPLE: Suppose an agribusiness manager wants to lock in current prices, but won’t sell his crop until September. In April, he sells a July corn futures contract. In July, he rolls into a September corn futures contract. He settles when he harvests in September.

ECONOMIC EXAMPLE: A firm has 15-year fixed debt with a five-year callable option and wishes to reduce exposure to the fair value changes of the debt. It enters into a receive fixed/pay variable interest rate swap to effectively convert the debt from fixed to variable.

Current Model

Gains or losses on the futures position is deferred until the debt is issued. Then gain or loss on the futures position is amortized over the life of the debt.

Gains or losses on the July and September futures contracts are deferred until the crop is sold. The cumulative gain or loss on the futures contracts is recorded in current earnings when the corn is sold.

Interest income or expense on the swap is accrued and recorded as an adjustment to the interest expense on the debt.

New Model

Unrealized gain or loss on the futures position is deferred until the projected date of the debt issue. The realized gain or loss is included in current earnings on the originally projected date of the debt issue.

The July position is marked to market with gain or loss reported in current earnings. (July is not the forecasted transaction date.) Gains or losses on the September position are deferred while the position is open, then reported in current earnings when the position is settled.

There appears to be no swap transaction that would qualify as a hedge under the new model. Therefore, the change in the fair value of the swap is recognized in current earnings.

Observation

Under the current model, the gains or losses on the derivative are matched with the hedged transaction throughout the life of the hedged transaction. Under the ED, gains or losses are accumulated in comprehensive income until the transaction date, then they are taken to current earnings.

Under the current model, gains or losses of both hedging instruments are offset in current earnings when the corn is sold. Under the proposed model, gains or losses from the July futures are reported in current earnings without any corresponding offset. The gain or loss on the September position will match the underlying transaction.

Under the current model, there is a matching of the interest incomdexpense on the derivative and the hedged item. Under the ED, it appears that there are no swaps that would qualify as a hedge of this transaction. Therefore, the change in the fair value of the swap is recognized in current earnings and the debt continues to be camed at amortized cost.



The ED is subject to the criticism that it does not allow firms to reflect economic reality.

derivative contract will not coincide with the forecasted transaction date. Only the final contract in the roll-over sequence would qualify as a hedge. To be designated as a cash flow hedge, the maturity of the derivative contract must be on or about the date of the forecasted transaction. Exhibit 5 shows how an agribusiness manager cannot hedge the anticipated sale of his crop because futures contracts have standardized maturities that do not meet his needs.

In practice, there are multiple applications of futures contracts for roll-over hedges. Firms prefer to use futures contracts because they have desirable characteristics. Futures contracts are exchange traded and standardized, making them liquid with a readily determinable fair value, and minimal credit risk. With the implementation of the ED, firms may not hedge these transactions or use derivative instruments other than futures contracts to hedge their exposures. With the advent of this ED, there is a strong potential for the development of an instrument that will serve the users’ economic and financial reporting needs. The ED may, in fact, cause a new wave of financial innovations to come along to provide the user with the results desired. However, any new instruments may be less liquid and expose a firm to a greater degree of credit risk than futures contracts.

Reflection of Economic Reality The ED is subject to the criticism that it does not allow firms to

reflect economic reality. Of course, whether the proposed standard reflects economic reality depends on one’s view of economic reality. We will not assume we know what your economic reality is. There are two opposing views on how financial information is used, and thus how best to reflect the firm’s “economic reality.” A believer in market efficiency would be indifferent about the information value of qualifying for hedge accounting or not qualifying. As long as the information is presented in the financial statements, the user will be indifferent as to whether the gains and losses from the hedged item and the derivative are in current earnings or in other comprehensive income. Hedging disclosures also provide information about risk management objectives and the use of derivatives in attaining those objectives, so full and complete information will be available to the financial statement user. The form of presentation is irrelevant to the user with this view, so long as the information is, in fact, disclosed.

Others hold the view that, even though the firm may successfully hedge the economic risk exposure, the accounting presentation is important to the investor who does not fully understand the accounting presentation or the economics of the firm’s hedge designs. These individuals fear that the ED will require a successful economic hedge to be reflected in a statement of financial performance in a manner that does not reflect economic reality. These individuals believe that in order to not mislead the financial statement user, the accounting treatment of the hedge should be consistent with the economics


Pamela A. Smith, Came Catolas, and Curtis Norton -

The ED represents another step in the FASB’s Financial Instruments Project and another step toward fair value accounting.

underlying each specific hedge strategy. In this view, the derivative and the hedged item should be inextricably linked throughout the life of the hedged item.

Another difficulty in reflecting economic reality is the inability to accurately forecast the exact date of forecasted transactions. To obtain qualification for a cash flow hedge, there needs to be a reasonably accurate forecast of transactions. This requirement may be difficult to achieve.

Exhibit 5 shows the inability to meet the ED hedge criteria to hedge debt with an embedded option. Because of the purchased call option embedded in the debt, changes in the fair value of either a five- year callable swap or a 15-year swap will not be expected to substantially offset the changes in the fair value of the debt on an ongoing basis. Therefore, under the ED, neither swap strategy could be accounted for as a hedge.

The inability to make accurate forecasts may cause additional problems when an unanticipated event occurs or the forecast is off by some unforeseen reason. The ED will require the hedge to be disentangled and reflected on the financial statements on the forecasted date. Depending on the circumstances, the disentanglement on the wrong date may result in more aberrations to the financial statement than not hedging a t all.

IS THE ED TOO RESTRICTIVE? The ED represents another step in the FASB’s Financial

Instruments Project and another step toward fair value accounting. The FASB has been under pressure to produce a standard for improved reporting of derivatives, and the ED represents its effort after considering several other alternatives. It represents a compromise position in that the hedge accounting desired by many firms is allowed, but only if a series ofcriteria are met and documented. Still, it is not entirely clear whether the ED will be adopted in its present form. Significant resistance has begun to develop from firms that believe the ED is overly restrictive and does not allow them to accurately portray their use of derivative instruments. Those that are concerned about the accounting and disclosure of derivatives are encouraged to submit comment letters to the FASB and closely monitor FASB activities during the ED comment period. The written comment deadline is October 11, 1996, and the proposed effective date of the ED is for fiscal years beginning after December 15,1997. +


fasb's derivatives ed: some concerns about applying the proposed standard

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