WASHINGTON -- Banks using derivatives will be subject to broader 'reporting requirements starting with 1994's annual reports.
The Financial Accounting Standards Board will unveil today the final version of a 10-month-old project to improve disclosure requirements for derivatives. FASB is the independent board that sets accounting rules for all companies that follow Generally Accepted Accounting Principles.
All but the smallest banks have "got to look at this and they have got to look at it quickly," said FASB project manager Halsey Bullen.
The new disclosure rules incorporated in the board's Financial Accounting Statement 119 only cover certain kinds of derivatives, Mr. Bullen said.
For instance, FASB's definition of derivatives includes instruments such as futures, forwards, options, swaps and similar financial contracts. Not included are structured notes and such mortgage-backed securities as interest-only strips or principal-only strips.
FAS 119 takes effect for annual disclosure reports starting with fiscal years that end after Dec. 15. However, companies with less than $150 million in assets get an additional year before the rules kick in.
For most banks, the most important new disclosure requirements are for derivatives that are not actively traded. Only the largest banks typically trade derivatives, Mr. Bullen said.
For those derivatives, FASB requires. disclosure of the purpose in holding the instrument and the accounting treatment the company plans to use for it. FASB encourages - but does not require - additional, quantitative disclosure, such as the market risk of the instrument.
Banks must also disclose more about instruments they use for "trading purposes, which includes dealing and other trading activities measured at fair value, with gains and losses recognized as earnings," Mr. Bullen said.
For trading instruments, banks and other companies must begin disclosing the average fair value of the derivative instrument for the annual reporting period. They must also continue to disclose the fair value of the instrument at the close of the reporting period. They may choose to make such disclosures each quarter, but are not required to do so, Mr. Bullen said.
They must also disclose the net gains and losses accruing from trading derivatives. But FASB left some flexibility in the disclosure rules - companies do not have to list profits and losses for each derivative instrument, but rather category by category, depending on how the company tracks them.