WASHINGTON -- The Financial Standards Accounting Board said it may issue draft standards before next April that would require dealers and users of derivatives to disclose more about their derivatives activities in their financial statements.
"The plan is to try to do something quite rapidly," said Halsey Bullen, a FASB project manager, in an interview last week.
The board, which is being urged by the Securities and Exchange Commission and others to improve disclosure standards for derivatives, wants to have some new or improved standards in place by the end of 1994 so that firms can apply them to their end-of-the-year financial statements, Bullen said.
That means the board would have to issue draft standards in the first quarter of 1994, he said.
The new standards, when they are issued, will probably apply to both dealers and end-users of derivatives, Bullen said.
Typically, the boards' standards apply to all firms that are required to file financial statements, he said.
"It might be that the same requirements would apply [to dealers and end-users] even though they would have different effects," Bullen said.
The SEC requires public firms to file financial statements and to subject themselves to periodic audits.
Private firms also file financial statements and undergo audits for a variety of reasons. Certified public accounting firms typically insist that financial statements and audits follow the board's accounting standards.
One option that the board is considering for improving disclosure would be to expand an existing standard that requires firms to make disclosures about financial products with off-balance sheet risks. Known as Statement 105, the standard has been in place for a couple of years.
Statement 105 currently requires firms to describe these instruments and to disclose their notional principal amounts as well as information about credit risk, Bullen said.
But the standard excludes certain derivatives products like interest rate caps and products whose gain in value over time has not been reflected in their balance sheets. The board is considering expanding the standard to cover these and other such products, Bullen said.
A second option would be for the board to strengthen another existing standard, Statement 107, which calls for firms to disclose the fair market values of financial instruments.
Bullen said that FASB and others have been disappointed by the way this standard has been applied in some cases.
Some firms, for example, have been disclosing the net fair value of their interest rate swaps on an aggregate basis without any indication of whether that figure is positive or negative.
In addition. firms have been netting their derivative products against each other and against other financial instruments in a way that obscures information about their derivatives activities, Bullen said.
A third option, he said, would be for the board to require firms to disclose whatever gains and losses they are deferring in connection with their hedging transactions. The board had planned to consider this in its ongoing project of writing hedge accounting standards. But that porject is not expected to be completed in the near term.
A fourth option is for the board to require firms to disclose how their derivatives activities are affecting their interest rate risks. Currently, under Statement 105, firms are required to discuss the market risks of certain derivative instruments. But the standard does not cover all derivative products and has not always been applied in a way that yields meaningful information, Bullen said.
"It's not always clear from looking at dealers' financial statements what's going on," he said. "The comments we're getting make clear that the resulting disclosures are falling well short of what investors and creditors need to understand the risks and risk management activities of dealers and end-users."
FASB Seeks Improved Derivatives Disclosure
Options under consideration: 1 Expand existing standards governing
disclosujre of off-balance sheet risks
to include more derivatives
products, such as interest rate caps. 2 Strengthen existing standards to
require firms to more clearly
disclose the fair market values of
their derivatives and other financial
instruments. 3 Require firms, in new standards, to
disclose whatever gains and losses
they are defering from derivatives
and other hedging transactions. 4 Strengthen existing standards to
require firms to more clearly
disclose how derivatives activities
are affecting their interest rate risks. Source: Financial Accounting Standards Board
