August 1999

Delays Implementation of Derivatives and Hedging Standard

Citing concerns about companies' ability to modify their information systems and educate their managers in time to apply Statement 133 on derivatives and hedging, the Financial Accounting Standards Board has delayed the statement's effective date for one year, to fiscal years beginning after June 15, 2000. The delay, published as FASB Statement 137, applies to quarterly and annual financial statements.

Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that entities recognize all derivatives as either assets or liabilities in statements of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as:

* a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment,

* a hedge of the exposure to variable cash flows of a forecasted transaction, or

* a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction.

The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation.

"We have received a number of requests from constituents asking for a one-year delay, based on unforeseen problems with getting systems up to speed for year 2000 considerations," FASB Chair Edmund L. Jenkins said. "Others had questions about applying Statement 133 in practice and had a need to educate their people internally about the new standard's requirements."

Jenkins said FASB continues to believe that investors should have the kind of information Statement 133 provides. He said that FASB also understands the difficulties faced by companies that have to provide this information, for the most part, for the first time.

"We also must be responsive to the companies that will be supplying that information to ensure that the standards are implemented consistently and in a manner that is the most complete and useful to investors," Jenkins said.