FASB redefines derivatives

The Financial Accounting Standards Board (FASB) yesterday amended the definition of derivatives within its mark-to-market accounting regulation FASB 133.

The amendment was needed particularly to resolve ambiguities over when beneficial interests in securitised financial assets such as securitised credit card receivables can be reported as derivatives.

Clarification of the circumstances under which either an option-based or non-option-based financial contract with an initial net investment qualifies as a derivative would lead to more consistent reporting of financial contracts as either derivatives or financial hybrids, FASB claimed.

Option-based contracts are defined as having an initial net investment equal to the fair value of the option component. Conversely, non-option-based contracts are defined as requiring an initial net investment less than 5% of the fully prepaid amount.

FASB is aiming to implement this accounting change by November 15, 2002, at the earliest. A consultation period where interested parties can submit comments on the proposed change will end in July.

FASB was established in 1973. It is a private sector organisation responsible for financial accounting and reporting in the US.