Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the intended use of the derivative and the resulting designation.

Congress Reacts

Derivatives and hedging financial instruments­and FASB's actions­have stirred up a lot of controversy, to the point that Congress reacted to the debate over the standard with hearings in the House Subcommittee on Capital Markets, Securities, and Government-Sponsored Enterprises in October 1997, and subsequent bills introduced in both the House and Senate.

Senator Lauch Faircloth (R-NC) introduced the Accurate Accounting Standards Certification Act of 1997, S. 1560, a bill which would essentially absolve banks from any FASB statements on derivatives, unless the standards would accurately reflect the assets, liabilities, and earnings of the entity, and not diminish the use of risk management practices. Given this favorable treatment, it is no surprise major U.S. banks and the International Swaps and Derivatives Association support the legislation.

Congressman Richard L. Baker (R-LA), chair of the House subcommittee that held the hearings, expressed concern that the impact of the proposed rule on companies, particularly banks, has not been adequately considered. He introduced the Financial Accounting Fairness Act of 1998, H.R. 3165, a bill that would eviscerate the private sector standards-setting process by making accounting principles subject to court suit, among other actions.

SEC Also Gets Involved

The Securities and Exchange Commission issued its first comprehensive guidance on additional disclosures of derivatives and other financial information. The objective of the disclosure is to provide investors with better assessment of the market risks and understanding of how those risks are managed. The new requirements relate to disclosures only.

The effect is for all public companies to include the accounting policy disclosures in financial statements for fiscal years ending after June 15, 1997. Qualitative and quantitative information by all banks and thrifts, as well as other public companies that have market capitalization of over $2.5 billion on January 28, 1997, are to make the disclosures in SEC filings that include financial statements for fiscal years ending after June 15, 1997. For smaller public companies, the effective date for the quantitative and qualitative disclosures is delayed one year.

The SEC's office of the chief accountant and the division of corporate finance has published frequently asked questions and answers about the new market risk disclosure rules to assist companies that must provide the quantitative and qualitative disclosures. See the SEC's website at www.sec.gov/rules/othern/derivfaq.htm.

The derivatives standard resulted from years of study on the issue. See the accompanying timeline for a brief history. FASB compromised over several issues, including extending the implementation date to allow financial statement preparers more than one year from the publication of the standard to get systems in place.

Perhaps in expectation of continued scrutiny of its rule, FASB formed a special implementation task force to handle anticipated questions from preparers of financial statements who apply the standard. The board also designed a training course on Statement 133.