FASB issues ED on derivatives.

In response to increasing concerns about derivative financial instruments, the Financial Accounting Standards Board issued an exposure draft of a standard that would require more complete disclosures about such instruments.

Derivatives--instruments whose cash flows are derived from the value of some other asset or index--include forwards, futures, swaps and option contracts. Over the past few years, more than 600 types of such contracts were created. They provide an effective way to manage risk, but only when those who deal with them really understand them. However, derivatives are among the most complex financial instruments, and investors and analysts can misinterpret (or be misled by) derivative disclosures (or the lack thereof) in financial statements.

With several trillion dollars held in derivatives around the world, the FASB decided last December to expand on Statement no. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and Statement no. 107, Disclosures about Fair Value of Financial Instruments. The ED requires derivatives to be categorized as held either for trading or for other purposes, including risk management. The proposed FASB statement requires the following disclosures for derivatives that are not required for other financial instruments:

* Average, maximum and minimum aggregate fair values.

* Net trading gains and losses.

* Hedging gains and losses.

* The purposes for holding or issuing.

Expanded disclosures, however, do not solve the whole problem. "It's a good first step toward standardization," said William Roberts, senior vice-president and controller of First Chicago Bank, a major user and broker of derivatives. "The FASB has done a good job of listening to users and dealers of derivatives, but it needs to go a lot further."

One area that requires further study is hedge accounting, a risk-reducing activity involving extensive use of derivative instruments. The FASB already has a project on hedge accounting under way.

Barring radical changes, the new disclosure rules could go into effect for fiscal year 1994.

Copies of the ED are available at $11 each for nonmembers from the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut, 06856-5116.