The Financial Accounting Standards Board is expected to alter its controversial derivatives plan to ease banking industry concerns about hedging prepayment risks.
The accounting board would still require banks to record at fair market value derivatives used to hedge the risk that borrowers will prepay their mortgage loans, FASB Chairman Edmund L. Jenkins said Friday.
However, it will clarify that banks may offset the resulting fluctuation in their quarterly income statements by also recognizing the fair market value of the underlying mortgage servicing asset, he said.
"This has been an area of misunderstanding," Mr. Jenkins told reporters after a speech to the American Institute of Certified Public Accountants here.
Banking industry representatives praised the change. Without the ability to offset the derivative-the market value of which tends to fluctuate in the opposite direction from the asset it is hedging-financial institutions' earnings would be distorted, said Marti Sworobuk, president of Financial Standards Inc.
"This would be a real positive for the banking industry," said Ms. Sworobuk, whose Washington-based firm specializes in financial reporting policy. "It would reduce a lot of the volatility."
However, the relatively small change is unlikely to overcome the industry's opposition to the overall proposal, which FASB plans to adopt by yearend.
Critics claim the proposal would create a false picture of a company's performance because most derivatives are held until maturity; the plan would require companies to report market value changes of these contracts quarterly. Industry leaders and lawmakers have also complained that FASB has generally ignored suggested changes in the proposal.
Michael Sutton, chief accountant of the Securities and Exchange Commission, vigorously defended FASB's work on the derivatives plan in a separate speech to the AICPA.
"The results of the board's work ... argue that the process is working well," said Mr. Sutton, whose agency oversees FASB. "Some people confuse being heard with being obeyed. They are not the same."
Mr. Jenkins echoed Mr. Sutton's comments, saying that all substantive suggestions submitted to FASB are being considered seriously. The plan was open for comment until Oct. 14.
"Every once in a while we find someone who turns on a light in us," he said.
However, Mr. Jenkins complained that much of the criticism being leveled at the accounting board is without merit.
"I don't think multiple attacks or the use of form letters ... are particularly helpful," Mr. Jenkins said. It would be more useful to "provide alternatives rather than just saying, 'We don't like this.'"