The Association for Financial Professionals surveyed treasury and finance professionals in early January, and found that the burden of the Financial Accounting Statement 133 (FAS 133) has reduced the use of different types of derivatives by as much as 8%-17%. Additionally, a full quarter of respondents now apply regular derivatives accounting, rather than taking the time/energy to qualify for special hedge accounting under the rule.
FAS 133 is an accounting rule that 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.
Before FAS 133?s adoption, hedgers showed a marked preference for interest rate swaps to hedge interest rate exposures and forward contracts to hedge currency and commodity price exposures, according to the report. Since that time the original preferences for swaps and forwards seem to have been enhanced, at the expense of plain vanilla options, futures contracts and other derivatives.
Two thirds of firms that had formal risk management policies in place before the adoption of FAS 133 reported that their existing policies had to be amended to accommodate the new standards.
Twenty-three percent said risk management activities were more centralized as a result of FAS 133. Only 25% agreed that FAS 133 imposed a beneficial discipline on risk management activities, while nearly half (47%) took issue with that perspective.
Auditors and consultants were reported to be the most favored source of information about FAS 133, while bankers were the least favored source.
The survey is online at http://www.afponline.org/pdf-non/research/fas1330601.pdf .