Federal Reserve Board Chairman Alan Greenspan, stepping into a controversy over derivatives accounting, has criticized a Financial Accounting Standards Board proposal as expensive, risky, and confusing.

In a five-page letter to FASB chairman Edmund L. Jenkins, Mr. Greenspan said the plan to require companies to report derivatives at fair market value on quarterly income statements could backfire.

"The proposal may discourage prudent risk management activities and in some areas could present misleading financial information," Mr. Greenspan warned in a letter dated July 31 and made public Wednesday.

As an alternative, the Fed chief recommended allowing firms to continue reporting historical costs with a "supplemental" statement listing the fair market value. Initially, he said, only larger market participants should be required to file the additional report, and the FASB should supply detailed guidance on how to estimate fair market values.

Mr. Greenspan said this approach "could increase transparency of financial information, promote enhanced risk management, and potentially lead to greater international harmonization of accounting standards."

Echoing concerns bankers and other derivatives users have voiced since the FASB issued its plan in June 1996, Mr. Greenspan also argued that the proposal would distort earnings because derivatives contracts change value as the price of underlying assets fluctuates.

In addition he cited concerns about cost. Banks would be required to make "significant systems changes to identify and report the fair-value information required by the FASB approach," he wrote.

Industry representatives applauded Mr. Greenspan's suggestion.

"It is important to the process for Greenspan's views to be heard, because this is much more than just a narrow accounting issue," said Roger W. Trupin, Citicorp's controller. "It is an issue that potentially could have a serious impact on the overall economy."

"This would be a much easier pill to swallow than full market-value accounting," added Donna Fisher, the American Bankers Association's director of tax and accounting.

In a brief written statement issued Wednesday, Mr. Jenkins said the FASB will respond to Mr. Greenspan early next week.

"As with all comment letters we receive on projects, we will consider Chairman Greenspan's comments carefully in our further deliberations," Mr. Jenkins said. He was in an all-day board meeting and unavailable for an interview Wednesday.

Mr. Greenspan's critique followed a letter sent to the FASB last week by senior executives from 22 major companies who urged the rulemaking body to slow down. They contended that the FASB is not adequately considering the rule's effects.

However, in a reply released Monday, Mr. Jenkins said the FASB plans to move forward, hoping to complete the plan by yearend and implement it Jan. 1, 1999.

Ignoring Mr. Greenspan's concerns could spur congressional scrutiny of the derivatives plan. Sen. Phil Gramm, R-Tex., has been a vocal critic of the proposal, and has held two hearings on the subject.

"Were FASB to disregard this letter, it would really throw into doubt their rulemaking process," a Senate Banking Committee staff member said. "Senators have said they are not in the rulemaking business, but that doesn't mean they don't have an appropriate role scrutinizing the process."

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