The Financial Account Standards Board win discuss Wednesday whether financial intermediaries should be treated differently from other companies in the hedge accounting project currently in its early stages.

"We have been told that the current rule that a hedge be designated specifically to the individual asset being hedged is extremely difficult," said Halsey Buben, manager of the hedge Accounting project. "Another problem is that Financial Accounting Statement 80 requires that there must be a high correlation between a hedged item and the hedging instrument. This is very difficult for mortgage-backed securities derivatives because each one behaves so differently."

Bullen emphasized that the project was in its early stages and that FASB members were a long way from approving a proposed statement. The comment period on a discussion draft ended May 31.

FASB has tentatively defined hedge accounting "as a special treatment that ensures that changes in the values of the hedged item and the hedging instrument, from the date the hedge is established, are counterbalanced in the same period(s)."

Except for two narrow accounting standards, FASB has no overau standards for accounting. Thus, hedging practices and their accounting treatment have been diverse. But tighter regulatory restrictions on the use of high-risk tranches in MBS derivatives have limited banks and thrifts in their use of these assets in hedging activities.

According to a FASB report on hedge accounting published last year, the problem arises because the hedge and the hedged item often are measured differently. For example, some are accounted for by historical cost and others are marked to market.

The report suggested three possible approaches to resolve the problem:

* Hedge accounting could be deferred. Thus, gains and losses on the hedging instrument would not be recognized as they occur, but would be deferred until the hedged item was derecognized.

* Both the hedged item and the hedging instrument could be marked to market.

* The focus could be placed on just one hedge component. Thus, if the focus is on the hedged item and it is marked to market, the hedging instrument would be marked to market. If the focus was on the hedging instrument and it is carried at Historical cost, the hedged item would be changed to historical cost.

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