FASB Expected to Propose Relaxing Its Controversial Derivatives

The Financial Accounting Standards Board is expected to propose on Wednesday that one of the more controversial provisions in its derivatives accounting plan be relaxed.

Industry sources said the board now wants to let banks and others effectively defer reporting unrealized gains and losses in the value of some derivatives contracts used in hedging. The proposal issued last June would require the changes to be reported on income statements each quarter even though the contracts often last for years.

"This is definitely a positive, because it is a small step closer to what users are doing today," said Donna Fisher, the American Bankers Association's manager of tax and accounting.

The original proposal was met with strong criticism from derivatives users, who argued that such a rule could distort reported earnings.

While details on the expected proposal were sketchy Monday, Robert C. Wilkins, the board's senior project manager, confirmed that "We're going to be talking about something somewhat analogous to deferral accounting."

The expected changes would affect only fair-value hedges - derivatives that are used to guard against changes in the market value of loans, securities, and other financial instruments.

Industry sources said they expected the board to drop a provision requiring quarterly reporting of changes in the fair value of hedged items caused by interest rate fluctuations.

Sources also said FASB could propose an amortization method. Under this plan, a $12 change in the value of a derivative that was hedging a one-year loan could be reported as a $1 per month change in the value of the loan, rather than a one-time, $12 change in the value of the hedge.

"The nice thing about the effect of this is that it more closely follows the true economics of the hedging transaction," said Marti Sworobuk, president of Financial Standards Inc., a Washington consulting firm specializing in financial reporting policy. "You won't be forced to recognize the arbitrary fluctuations in the market."

The seven-member accounting board must vote to make the changes to the overall proposal, which is expected to be finalized by the end of July. The accounting board has already made some concessions to derivatives users. At a meeting in March, FASB agreed to delay the deadline for compliance to July 1, 1998, from Dec. 15, 1997.

However, industry representatives said the FASB proposal is still a long way from satisfactory.

"Even with these changes, there is still a huge gap between their proposal and the way risks are being managed," Ms. Fisher said.

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