NORWALK, Conn. - The American Bankers Association this week took its first stab at proposing a comprehensive framework for derivatives accounting.
The ABA accounting committee, in a meeting Tuesday with the Financial Accounting Standards Board - which has been trying since January 1992 to come up with a derivatives standard - recommended dividing the financial instruments into four categories.
William J. Roberts, senior vice president and controller of First National Bank of Chicago and chairman of the ABA accounting committee, emphasized that not all of its members were happy with the proposal. He called the four categories "grudgingly accepted guidelines, or GAG."
Grudgingly accepted or not, however, the proposal is significant if only because the ABA includes representives of both sides of the derivatives equation: traders and customers.
The categories are "trading derivatives," "unlinked derivatives that are not trading," "derivatives that hedge specific instruments," and "derivatives that synthetically create new instruments."
Members of the accounting standards board had their doubts - chiefly because they said they feared institutions would find ways to hide speculative derivatives trading in other categories.
"Are we getting rid of the notion that a speculator records things through earnings?" asked James Leisenring, the board's vice chairman.
Still, several board members said they saw the bankers' plan as a welcome step forward in an area where there has been little progress.
Mr. Leisenring said all the parties involved in the derivatives debate have collectively managed to bring the process of developing a standard "to a screeching halt."
Under the ABA proposal, the gains and losses from trading derivatives - those entered into to take a speculative market position - would be marked to market and accounted for on an ongoing basis in earnings.
Other derivatives would be subject to somewhat less strict accounting.
Nontrading derivatives that aren't envisioned as hedges to any specific risk would be marked to market, but their unrealized gains and losses would be recorded in shareholder equity, not earnings. Only after the termination of the derivative would gains or losses show up in earnings.
Derivatives that hedge specific risks would have to be marked to market and accounted for in earnings only if they proved to be ineffective over two straight reporting periods. Synthetic derivatives - wherein two different contracts are used to create one final product - would be measured and accounted for as the financial instrument they create.
The Financial Accounting Standards Board has issued guidelines on foreign exchange and futures contracts, but not on swaps or options. Banks and other companies with these instruments on their books have tried to squeeze them into existing categories as the board has struggled to come up with a comprehensive framework for derivatives accounting.
The general thrust of the board's efforts has been to require market value accounting for virtually all financial instruments.
"We agree that that's one way to solve the dilemma," said First Chicago's Mr. Roberts. "We don't agree that it's the right way. We don't even think it's doable. We can't do market values for a lot of financial instruments."
