Isda says more work needed on accounting standard

The International Swaps and Derivatives Association (Isda) has filed comments on the draft standard “Financial Instruments and Similar Items”, proposed by the Joint Working Group of Standard Setters (JWG).

The draft, issued in December 2000, represents the views of the JWG members, who are representatives or members of accounting standard setters or professional organisations around the world. The primary objective of the draft is to reflect in the balance sheet and income statement the effect of market events on the fair value of an enterprise’s financial instruments, and similar items, in the periods in which these events occur.

“Isda welcomes the JWG’s initiative... however, our committee strongly agreed that a fair value model based on guidance contained in the draft standard would be significantly flawed,” said Robin Doyle, a vice-president at JP Morgan Chase and chair of Isda’s North American Accounting Committee.

As regards the proposed valuation methodology, Isda said the hierarchy would be too restrictive: “It may be more appropriate in some circumstances to refer to the market exit price for a similar asset on the reporting date, than attempt to adjust for an out-of-date market exit price for the same asset. Flexibility and fair judgment are tantamount in making appropriate fair valuations for an instrument.”

Although Isda agreed that a full fair value accounting model would eliminate the need for hedge accounting in many cases, it also believes that the “concept of hedge accounting remains relevant where financial instruments are used to hedge forecasted transactions like the future acquisition or disposal of non-financial items, or forecasted foreign currency revenues and expenses.”

On the issue of presentation and disclosure, Isda is pressing for further consideration by the JWG, suggesting that “wherever possible, disclosure should be based on information firms use to manage their businesses in order not to impose dual reporting burdens. At the same time, the disclosures must be carefully considered to ensure that they do not reveal proprietary trading information to competitors.”

Isda has also written to the JWG that it does not believe that “a period of two years is adequate for the implementation of an accounting standard that fundamentally changes the way entities will account for financial instruments”.

The association added that it recommends international standard setters to consider developing separate projects addressing each of the major areas covered in the Draft Standard, rather than tackling all the issues with a single document.

Rob Stevens, a managing director at CSFB and Isda’s European accounting committee chairman said: “In addition to comments on the technical aspects of the document, Isda is also concerned that the sheer volume of material covered in this draft resulted in a flawed consultation process. Addressing the issues through smaller, more focused projects would allow for a better assessment of the impact of implementation.”

“We suggest that the standard setters engage various constituents to field-test narrow segments of the guidance. We believe that taking the initiative to do this work early in the standard setting process will help greatly in providing rules that are clear and easy to apply to real business transactions. Otherwise we would find ourselves in a situation similar to that being experienced with SFAS 133, ‘Accounting for Derivative Instruments and Hedging Activities’, SFAS 140 and IAS 39, ‘Financial Instruments: Recognition and Measurement’, where volumes of questions and answers need to be written just so constituents can understand how to apply the rules”, warned Isda.