FASB Issues Statement on Accounting for Derivative Instruments

Washington, DC, July 1, 1998 - The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 establishes accounting and financial reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. FAS 133 applies to all entities that prepare financial statements in accordance with generally accepted accounting principles.

While FAS 133 may materially change the level of earnings or the financial position reported by historical cost based entities that engage in derivatives transactions, it should have no impact on investment companies, since funds are currently required to value their derivatives-related assets and liabilities at market value, with changes in value reflected in earnings. Entities that follow mark-to-market accounting with changes in value reflected in earnings are exempt from the requirement to separate embedded derivatives from their host contract.

FAS 133 requires financial statement footnote disclosure of the objectives for engaging in derivatives transactions, the context needed to understand those objectives, and the strategies for achieving those objectives. Qualitative disclosures describing the overall risk management profile are encouraged, but not required.

FAS 133 supersedes FAS 80, "Accounting for Futures Contracts," FAS 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk, and Financial Instruments with Concentrations of Credit Risk," and FAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." FAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999.

Separately, two bills have been introduced in Congress that would limit FASB's standardsetting authority. H.R 3165, introduced by Richard Baker (R-LA), would require explicit review of FASB standards by the SEC. S. 1560, introduced by Lauch Faircloth (R-NC), calls for federal regulators to review banks' application of FASB standards for potential harm to risk management, and, if such harm is found, the standards would not be applied. These bills have not attracted cosponsors and hearings on them have not been scheduled.