A controversial new accounting rule that requires companies to mark their derivatives to market has had an unexpected side benefit for firms that generally do not use hedging strategies.
Financial Accounting Standard 133, scheduled to go into effect in June, is being adopted early by some banking companies that want to take advantage of its one-time only offer to reclassify certain securities.
"Using derivatives introduces a level of uncertainty that we would rather avoid," said David Wallace, chief financial officer of Syracuse, N.Y.-based Community Bank System Inc. But using FAS 133 allowed the $1.7 billion-asset company to reclassify $212 million of its securities from held-to-maturity to available-for-sale.
"If the securities that we wanted to take gains on were left in the held-to-maturity category, we couldn't have taken those gains," Mr. Wallace said.
The shifting provision came about to make up for the fact that FAS 133 prohibits companies from hedging securities that are being held to maturity. The one-time only opportunity allows firms to move those instruments into categories where hedges can be established for them.
Of course, many companies that have implemented FAS 133 have not done so just because they were interested in setting up new hedges.
"Keeping securities in held-to-maturity can limit your ability to make good business decisions about your portfolio," said Debbie Lee, chief financial officer for $2.2-billion Triangle Bancorp of Raleigh, N.C., which started using FAS 133 during the first quarter.
"If I could stand the volatility on the equity statement, I would put 100% of the securities in available-for-sale," Ms. Lee said. Securities held in that category are marked to market at least quarterly and show up in a company's equity statement.
Companies which use Generally Accepted Accounting Principles were able to implement FAS 133 as early as last year.
Firms operating on a calendar fiscal year have to start using the new standard in the first quarter of 2001. Companies whose fiscal year ends in September would implement FAS 133 in the last quarter of 2000.
FAS 133 has received some negative publicity because analysts believe marking derivatives to market will increase earnings volatility at banking companies.
In response to industry complaints that the standard was too complicated to be implemented while companies prepared for Year-2000, the Financial Accounting Standards Board pushed back the start date by one year.
And even smaller banking companies, whose involvement with derivatives is usually limited, may choose to wait on adopting the standard. "FAS 133 is a very complex standard," said Craig Dabroski, accounting specialist at America's Community Bankers, the Washington-based trade group. He noted that some institutions had adopted the standard and then later realized they had hedges that would be affected. "Once you adopt it, you can't go back."
