In both 2001 and 2002 AFP surveys, respondents blamed FAS 133 for being “excessively burdensome” and many cited the rule to explain a decline in overall hedging activity.
FAS 133 requires companies to account for derivatives on their balance sheets based on their market value at the time of reporting. The Financial Accounting Standards Board (FASB) issued FAS 133 in June 1998 with a June 15, 2000 effective date.
However, most companies had to comply with these new rules pertaining to accounting for hedging transactions and derivative instruments for the first time beginning with the first quarter of 2001.
Even when using derivatives tools, many companies choose
not to take advantage of hedge accounting because of the
complexity of FAS 133, according to the latest AFP poll.
Almost a quarter of the respondents say that their company
has decided to forgo hedge accounting on “significant
portions” of derivative positions as a result of FAS 133.
Another reason for the reported decline in the use of derivatives tools may be a perception that market conditions have eased the need for hedging activities over the past year. This perception is likely based on relatively lower interest rates, mild currency fluctuations and smaller commodity price swings, AFP said.
The latest survey found that 65% and 63% of companies
report that they use derivatives to address interest rate
and currency exposures, respectively. However, only a third
of responding companies indicated that they hedge commodity
or raw material price exposures.
AFP mailed an eight-page questionnaire to select corporate practitioner members in May 2002 and received 175 valid responses.