NEW YORK - Standard & Poor's Corp. expressed reservations this week about the Financial Accounting Standards Board's proposed improvements in accounting for derivatives.

The rating agency said replacing deferral hedge accounting with a mark- to-market approach, as FASB proposes, might discourage managers from entering economically viable transactions.

Marking such instruments to market would needlessly increase volatility in the equity section of the balance sheet, the agency said, and the risk managers might reject good deals out of fear that the reported financial condition of the company will look worse.

"S&P favors attempts to improve financial reporting, especially for derivatives, and recognizes there may be several advantages to FASB's approach," the rating agency said in a press release. "However, S&P believes the proposal essentially ignores the economic reality of hedging transactions as part of a risk management strategy."

S&P said enhanced footnoting of financial reports might solve the problem.

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