From the July-August 2008 issue of Treasury & Risk magazine

Hedging on FAS 133 Takes a Fair-Value Turn

FASB Accounting Standard (FAS) 133 on derivatives and hedging might be the regulation that everyone loves to hate but after 10 years and multiple revisions, many companies have gotten used to it as the devil they know. So, not surprisingly, FASB's latest fair value accounting proposal for hedges is garnering mixed reviews. The revision would simplify accounting for some - but by no means all - hedges and expand disclosures in financial statements. "People have been suggesting revisions almost since FAS 133 was issued in 1998," says Darren Greway, vice president of product development at treasury services provider FXpress. Greway sees the proposal as a step toward a better model for hedge accounting. "This is probably the most anticipated revision of any FASB statement for a long time," he adds.

Others question the need for more tinkering with FAS 133. "The trend in our market is that companies are becoming more comfortable with FAS 133," says Wolfgang Koester, CEO of FiREApps, a provider of foreign exchange exposure technologies.

Citing such stringent criteria and their costs, some companies have complained that consistent application of FAS 133 is too hard. FASB also worries that bifurcation-by-risk, a method requiring companies to hedge risks individually, keeps investors in the dark about risks that aren't hedged in a transaction.

FASB is proposing that bifurcation-by-risk, critical terms matching and the shortcut method be replaced with fair value accounting. Generally, companies would hedge only the overall risk of the changes in fair value of the hedged item or the overall risk of the changes in the hedged cash flows, so that their income statements would reflect the effects of both risks that are hedged and that aren't hedged.

If adopted, the changes would apply to fiscal years beginning after June 15, 2009, and interim periods within those fiscal years. The proposed revision of FAS 133, out for comment until Aug. 15, will probably draw the usual barrage of criticism, says Russ Mallett, a partner at PricewaterhouseCoopers. "There was a lot of dialog and letter writing when FAS 133 was first exposed," he says. "Companies cried foul because their existing hedge strategies weren't going to fit into the new standard. I think that many of the same companies will express similar concerns."

Clearer descriptions of a reasonably effective hedge and qualitative assessment would ease many of those concerns. FASB might include such guidance if it decides to adopt the proposed revision of FAS 133. Otherwise history could repeat itself, and this revision wouldn't be the last, again.

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