Citing higher compliance costs, the banking industry is blasting a plan by the Financial Accounting Standards Board to require all derivatives and other hedged instruments to be valued at market rates.
The board's proposal, put forth last week, also would prevent banks from hedging against changes in the value of core deposits or securities being held to maturity.
Bankers said the changes require banks to adopt expensive accounting procedures to produce financial data that would be of little use to investors. They also warned that this is another step toward market value accounting, a concept the industry has long opposed because it makes bank earnings more volatile. Market value accounting requires firms to take gains on securities as they occur, rather than when the instrument is sold.
"FASB is looking to this as a simplification," said Paul R. Ogorzelec, executive vice president and financial controller at BankAmerica Corp. "The rest of us look at this as adding more complexity to the problem."
"The banking industry isn't going to like this at all," agreed Donna Fisher, director of tax and accounting at the American Bankers Association. "It is just another step toward market value accounting."
Currently, banks report the market value of derivatives and other securities that are held in trading accounts. But securities held to maturity are recorded at original cost.
The accounting board did deliver some good news last week. It dropped a separate proposal to treat repurchase agreements of three months or longer as final sales. That proposal would have prevented banks from using held- to-maturity securities in repurchase agreements - because other accounting rules prevent them from selling such securities.
The board also retreated partially from its barebones derivatives proposal released in January. That version would have required banks to mark to market the full change in value of hedged instruments. Under the new proposal, however, a bank's reporting of changes in the value of a hedged item would be limited to the change in value of the underlying derivative.
This means a bank with a derivative that gained $10 would only have to report a $10 swing in the price of the hedged item, even if that hedged item actually lost $15.
The proposal also exempts most foreign exchange rate transactions from the new requirements. The January proposal would have covered these contracts.
Even with these improvements, William Leiter, controller for Banc One Corp., said he opposes the new proposal. Banks will have some items on their balance sheet at historical cost and others at market value, he said. "That doesn't help the reader of financial statements understand the basic operation of the entity," he said.
Carlos Mello, senior vice president and controller at People's Bank, Bridgeport, Conn., said banks should be allowed to protect themselves from interest rate fluctuations by hedging against core deposits and held-to- maturity securities. The accounting board has said these instruments shouldn't be hedged because their value doesn't change until they are sold.
"We support the board's efforts to try to bring consistency to the marketplace," Mr. Mello said. "But this is not sufficiently global to meet the economic needs of financial institutions."
Bob Wilkins, a project manager with the Financial Accounting Standards Board, said it wants a single rule for derivatives and hedge accounting. The board plans to release for comment a detailed proposal, based on last week's draft, by June 30.
