Accounting Board May Delay Use of New Derivatives Rule
By MELODY PETERSEN -- May 14, 1999
The nation's accounting rule makers may delay the
date when companies must begin following a
controversial
new rule that requires them to record the value of
derivatives in their financial statements.
In the last month, the Financial Accounting Standards
Board has received about 70 letters from public
companies concerned about the derivatives rule, said
Timothy Lucas, the board's research director. Many of
the letters asked for a delay in the rule's effective
date, he said.
While some companies must begin using the rule on July
1, most businesses must begin applying it on Jan. 1,
2000.
Many of the companies said in their letters that they
were concerned about instituting the complex rule,
which will require new computer programs, at the same
time that they are working to insure that their systems
will make the transition to 2000.
The companies also said that a group created by the
accounting standards board, known as the Derivatives
Implementation Group, had not yet answered some
critical questions from companies about how to apply
the new rules to certain types of derivative
transactions.
The board is expected to vote on whether to postpone
the rule on Wednesday, Lucas said. If approved, he
said, the delay would most likely be a year or longer.
If the board agrees to the companies' requests, it
would be the second time it has delayed the derivatives
rule. Many companies have lobbied against the rule,
saying it is impractical. Some banking companies even
took their concerns about the proposed rules to
Congress, asking lawmakers to take away some of the
accounting standards board's rule-making powers.
Companies use derivative contracts to help manage
business risks like changes in interest rates or
foreign currency rates. The transactions are known as
derivatives because their value is derived from an
underlying asset.
But the transactions are often risky bets on the
future. An example of the hefty losses that can result
from investing in the contracts came in September when
Long-Term Capital Management, the giant hedge fund with
big bets in the derivatives market, nearly collapsed.
The new accounting rule, which was approved by the
accounting board last June, requires companies to
record the market value of the derivatives on their
balance sheets and to include the gains or losses on
those contracts in income.
Copyright 1999 The New York Times Company
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