For the moment, revisions to Financial Accounting Standard 133 — Accounting for Derivative Instruments and Hedging Activities — are on hold. Last Wednesday, the Financial Accounting Standards Board delayed ruling on the need for a new project that would deal with the creditworthiness of derivatives issuers (see last month’s article “Should FAS 133 Be ‘Marked to Market’?“).
FASB is very likely to return to the issue, however: At last week’s meeting, three of the seven board members were already prepared to consider revisions, two members asked for further study, and two were opposed. The movement to revise FAS 133 began with comments by financial companies like JPMorganChase and Goldman Sachs Group in response to last year’s exposure draft on the Fair Value Measurement project.
Fair-value guidelines allow for the consideration of credit factors, but are financial markets taking credit into account when making their own valuations? Should this logic necessarily apply to derivatives valuation?
During last week’s meeting, board member Leslie Seidman, for one, maintained that “New York Stock Exchange-listed bonds change value on a daily basis because of credit risk.” As for “the various forms of contractual obligations that are specifically designed to mitigate credit issues,” as she put it, Seidman and board member Katherine Schipper argued that FASB should continue to study how collateral that secures derivative instruments can address the credit question.
Last Wednesday the board also issued Statement No. 154, Accounting Changes and Error Corrections, effective with fiscal years beginning after December 15. According to a FASB statement, under 154 all “voluntary changes in accounting principle” must be retrospectively applied to prior financial statements unless this is “impracticable.” It replaces APB Opinion No. 20, which had required that most such changes be recognized cumulatively in the period in which the change occurred.
Statement 154 “enhance[s] the consistency of financial information between periods” — and essentially adopts the position of the International Accounting Standards Board on this issue. “This is one example where the board concluded that the IASB requirements result in better financial reporting,” says FASB board member Michael Crooch. “We were able to make a meaningful improvement in U.S. GAAP while converging with the IASB.”
Items to be discussed at this Wednesday’s FASB meeting include:
• Liability extinguishment: rights and obligations associated with enforceable one-sided offers to sell goods, and whether those rights and obligations satisfy recognition criteria.
• Stable-value investments: the limited circumstances in which contract-value accounting is appropriate for fully benefit-responsive investment contracts held by an investment company.
• Financial guarantee insurance: discussion of whether to add a project that addresses the accounting for this insurance.