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To: long-gone who wrote (71325)	6/8/2001 4:56:06 PM
From: long-gone	Respond to of 116835

9:15 - 10:30 a.m. -- Market Transparency -- Panel includes Susan Bies, executive vice president, First Tennessee Bank; Laura Unger, Commissioner, Securities and Exchange Commission; Tanya Azarchs, director, Standard & Poor's; Peter Knutson, the Wharton School riskworld.com

To: long-gone who wrote (71325)	6/8/2001 5:25:51 PM
From: long-gone	Read Replies (1) \| Respond to of 116835

fei.org Financial Reporting Technical and Policy Issues May 5, 1999 Mr. Timothy S. Lucas Director of Research and Technical Activities Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT 06856-5116 Dear Mr. Lucas: The Derivatives Working Group of the Financial Executives International (FEI) Committees on Corporate Reporting and Corporate Finance requests that the Financial Accounting Standards Board delay the effective date for implementation of FAS 133 for one year. Companies and their outside auditors are struggling with implementation issues that arise from the standard itself, the DIG consensuses, and adaptation of accounting systems. This letter supercedes our previous letter of May 4, and has been written to incorporate certain additions and clarifications that were received after our earlier version had been transmitted to you. The FEI Derivatives Working Group is a joint task force addressing issues having to do with implementation of FAS 133, and includes more than twenty representatives of controller and treasurer organizations in a wide variety of U.S. companies. Our Working Group includes members from manufacturing, consumer products, technology, communications and entertainment and various other product and service industries, as well as from insurance companies and financial institutions. The experience of Working Group members and other business colleagues as we work to implement FAS 133 is indicating that this is one of the most complicated standards ever issued by the FASB. The Board clearly understands this issue as evidenced by the time and resources devoted to developing an extensive training program. The creation of the Derivatives Implementation Group to clarify many of the implementation issues also points to the types of questions companies are dealing with. As can be seen by the discussion surrounding many of the DIG issues, people with extensive knowledge of FAS 133 frequently do not know how to apply or disagree about the appropriate application of the standard to specific hedging strategies. These discussions are similar to those that companies are having every day with their auditors as they try to implement the standard. Industry groups that have exchanges among member companies are also having difficulty arriving at a consensus on interpretation of the standard. We believe the DIG process is important to help ensure consistency in the application of the standard, and that the effective date for FAS 133 should be delayed to let the DIG process finish its work on the majority of issues. Until FAS 133 interpretation for specific hedges is clearly understood, companies cannot specify programming changes in software. Software vendors have not yet incorporated FAS 133 functionality into their systems, and companies cannot direct their own information systems staffs to make changes until they can specifically identify the coding changes that need to be made. With resources already tight due to Year 2000 mandated activities, there is growing concern that these changes cannot be in place by the present effective date. For example, existing inventory accounting systems using LIFO/FIFO accounting rules are not able to support FAS 133 inventory hedging. Some companies who had wanted to early adopt FAS 133 are still trying to define and implement the changes to their accounting systems. Likewise, fixed asset accounting systems are designed to amortize the assets using historic costs. These systems must be redesigned to be versatile enough to handle unhedged, fair value hedged, and cash flow hedges of fixed assets. The number of issues yet to be addressed by the DIG suggests that it will be some time before the list will be resolved. Calendar year companies are having serious concerns about how they will implement changes to their planned FAS 133 accounting processes if a significant interpretation occurs late in the year that will require information system changes. Even in normal times, there is a lag between the understanding of how a consensus affects the hedging strategy and the definition and implementation of the system changes. Due to the Year 2000 risks, many companies are implementing some form of "freeze" on system changes. A survey of CCR member companies determined that more than half are planning some form of freeze, with the dates beginning as early as July 1999 and lasting as late as March 2000. For all companies, system resources are so limited that work-around solutions will have to be adopted until vendors and internal resources can be freed up to design the better long-term solution. We would prefer to have most of the DIG issues resolved before the effective date of FAS 133 to minimize rework and inefficient use of resources. The SEC on August 27, 1998 issued a "Policy Statement on Regulatory Moratorium to Facilitate the Year 2000 Conversion." This moratorium states that the SEC will issue no new rules requiring major reprogramming that would be made effective between June 1, 1999 and March 31, 2000. While we understand that this SEC policy statement specifically exempted rulings of self regulatory organizations and standards from the FASB from its provisions, we nevertheless believe that the SEC's action is an example of consideration given to the significant impact that rules and procedures changes can have in an unusual year that is crowded with many other demands on systems and personnel resources. A second type of implementation problem occurs when a DIG consensus causes a company and its auditors to modify their interpretation of FAS 133. Companies with centralized treasury operations for hedging are having to redesign their accounting systems as a result of DIG Issue E3. In some cases this also involves reassessment of the hedging strategies, and increased costs of hedging using gross rather than net positions with third parties. It is taking considerable time to define the new hedging strategies and accounting processes, determine how to manage the different types of hedge positions with broker/dealers, train staff, and implement the information systems changes. Another DIG decision that has considerable impact is E1, which is affecting many companies that had segmented risk and used derivatives to only hedge changes in the risk free interest rate component of fair value or cash flow. Companies had already designed FAS 133 hedging policies and procedures built on a "segmentation by risk" framework which is no longer permissible. The current market yield on the hedged item includes aspects of risk which were excluded under their existing segmented risk management policies and accounting systems. The new approach causes some derivatives to no longer meet the effectiveness criteria for FAS 133. New hedging strategies and accounting system changes must be designed and this is proving to involve major risk management and system decisions. Companies are struggling to assess effectiveness and measurement issues. These issues revolve around clarifying the application of FAS 133 to specific hedge strategies, DIG consensuses that change the expected measurement criteria, and aligning sophisticated risk management hedge criteria to the traditional 80%-125% test. Since effectiveness is at the heart of FAS 133, its implementation should be deferred until DIG addresses effectiveness. Other decisions of DIG that have significant effect on some companies include partial term hedging, combination of options, and the use of interest rate locks. Some companies are still struggling with scope issues, and identification of embedded derivatives. Companies have been working diligently with their auditors to implement FAS 133 by the current effective date. However, the systems and interpretation issues surrounding this very complicated accounting standard are raising considerable concern that the new standard will not be adopted in a consistent manner. For these reasons, the CCR-CCF Derivatives Working Group requests that the FASB delay implementation of FAS 133 for one year. We wish to emphasize that we are not making this request to re-argue the provisions of FAS 133 - our point is that one more year is critically needed to resolve the widespread and numerous open questions of interpretation and application that still exist, so that companies will be able to make the necessary systems and procedure changes in an orderly fashion. If you have any questions, please contact Susan Bies of First Tennessee National Corporation, at (901) 523-5662 or Corliss Montesi of United Technologies Corporation at (860) 728-7540. Sincerely, Susan Koski-Grafer Vice President - Professional Development and Technical Activities Financial Reporting Technical and Policy Issues FEI Home Page To report any errors or problems with this page, please contact the site administrator. Copyright ©1999 Financial Executives International. All Rights Reserved.