Amendment eases FASB No. 133 implementation.In June, after numerous business entities reported problems implementing FASB Statement FASB Statement A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting no. 133, Accounting for Derivative Instruments Derivative instruments Contracts such as options and futures whose price is derived from the price of an underlying financial asset. and Hedging Activities, FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). issued an amendment, Accounting for Certain Derivative Instruments and Certain Hedging Activities, to address those concerns. The newly issued provisions will ensure companies can more easily implement Statement no. 133. They have until the beginning of their first fiscal year after June 15--which, for many, is January 1, 2001--to do so. Robert E. Jensen, a professor in the Department of Business Administration at Trinity University Trinity University may refer to:
San Antonio is the second most populous city in Texas, the third most populous metropolitan area in Texas, and is the seventh most populous city in the United States. As of the 2006 U.S. , said, "The amendment is designed to address some of the complexities involved in implementing Statement no. 133." He noted, for example, that it relaxed restrictions on cross-currency hedges, which Statement no. 133 had effectively prohibited. In addition, the FASB amendment expanded the normal purchases and normal sales exception, redefined the specific risks that can be hedged and allowed the use of intercompany derivatives as hedging instruments in certain situations. Kevin Stoklosa, a FASB project manager, explained the reasoning behind the amendment provisions related to hedges of interest rate risk and hedges of foreign-currency-denominated assets and liabilities. "Before the amendment, Statement no. 133 permitted the market interest rate, defined as the risk-free rate Risk-free rate The rate earned on a riskless asset. plus the credit sector spread, to be designated as the hedged risk in a hedge of interest rate risk." (The risk-free rate is generally equated with the return on three-month U.S. Treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. obligations; sector spread is the premium borrowers offer lenders, in addition to the risk-free rate, as compensation for the risk associated with their debt instruments.) "The problem," Stoklosa continued, "was that the derivatives available for hedging interest rate risk were based on a definition of interest rates that did not include the sector spread." Therefore, the definition in the amendment now permits the use of a benchmark interest rate Benchmark interest rate Also called base interest rate, it is the minimum interest rate investors will demand for investing in a non-Treasury security. It is also tied to the yield to maturity offered on the comparable-maturity treasury security that was most recently issued (on-the-run). that excludes the sector spread. This enables companies to hedge interest rate risk with available derivative products. In addition, as Jensen observed, the amendment relaxes Statement no. 133's restrictions on hedging recognized foreign-currency-denominated assets and liabilities. Stoklosa noted that Statement no. 133 prohibits hedging items remeasured with changes in fair value reported in earnings. That notion was extended to hedges of foreign-currency instruments remeasured at current spot exchange rates Spot exchange rates Exchange rate on currency for immediate delivery. Related: Forward exchange rate. with the resulting gain or loss reported in earnings. "But," he said, "a measurement anomaly Abnormality or deviation. Pronounced "uh-nom-uh-lee," it is a favorite word among computer people when complex systems produce output that is inexplicable. See software conflict and anomaly detection. existed for certain foreign-currency instruments in which remeasurement at spot exchange rates did not represent fair value." Stoklosa said earnings volatility resulted when the changes in those foreign-currency items were compared to changes in the derivative hedging instrument, which is required to be measured at fair value. He said such volatility is mitigated by the amendment provisions permitting the recognized items to be designated as hedged items. The purpose of the amendment project, Stoklosa said, was to address a limited number of issues causing implementation difficulties for a large number of entities. In his view, the amendment has achieved its objective, especially for institutions heavily involved in interest rate derivatives An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a (usually notional) amount of money at a given interest rate. The interest rate derivatives market is the largest derivatives market in the world. , which are probably the most common type of derivatives in use today. Other kinds of companies will have fewer, if any, adjustments to make, Jensen said. The full text of the amendment is available on the FASB Web site at www.rutgers.edu/Accounting/raw/fasb/draft/amend133_ED.pdf Companies Use Sweet Deals to Attract Execs In today's competitive business environment, unfilled executive positions can turn companies that were market leaders into also-rans. So, recruiters are pulling out the stops to attract and retain the candidates they want. A survey this year indicated that enhanced compensation in various forms is being offered even more frequently than in 1999. [GRAPH OMITTED] |
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