Business executives, including bankers, will travel to Norwalk, Conn., next month to tell the Financial Accounting Standards Board what's wrong with its proposed rules on derivatives.
The proposal, issued June 20 but in the works for four years, calls on companies to report the fair-market value of derivatives in their financial statements.
Bankers are worried that this requirement, especially its effect on derivatives such as interest rate swaps, could make earnings appear more volatile than they really are.
These bankers say the plan could confuse and alarm investors, and they claim that the rules would discourage them from using derivatives to manage risk.
The board will hold four days of public hearings on the derivatives proposal, starting Nov. 15. Written comments were accepted from the industry until Oct. 11.
In a letter to FASB, William C. Leiter, senior vice president of Banc One Corp., Columbus, Ohio, termed the proposal "fatally flawed" and predicted it would "produce confusing and misleading results."
In a separate letter, David J. Parrin, senior vice president and controller, First Bank System, Minneapolis, called the plan "unnecessarily complicated."
A letter from the International Swaps and Derivatives Association said the plan "may lead companies to take on more risk rather than reduce risk through the appropriate use of derivatives."
The opposition to the proposed derivatives rules illustrates the mixed feelings corporations and the financial sector have about FASB, whose rules bind all certified public accountants.
Founded in 1973, FASB is a private group whose seven members serve full- time and typically have backgrounds as accounting professors, officials of major accounting firms, and corporate financial officers.
It is generally respected for its efforts to set uniform accounting standards in a fast-changing world.
"It does a fantastic job of making the best accounting standards in the world," said R. Harold Schroeder, an analyst with Keefe, Bruyette & Woods.
But the group also is criticized for not being responsive enough to the real-world problems those standards create. FASB is trying to fit a diversity of financial strategies into "a one-size-fits-all set of rules," said banking consultant Bert Ely.
And FASB might be too willing to write new standards, whether they are needed or not, said Donna J. Fisher, the American Bankers Association's director of tax and accounting.
The derivatives proposal is a case in point. Ms. Fisher said what's really needed are modest changes to current accounting rules, such as consolidating all derivatives rules into one standard.
"But when FASB gets into a project like this they get on a roll and can't stop," she said.
