Risk Management

FASB Seeks New Derivatives Disclosures

The board wants companies to supply tables displaying notional and fair-value amounts of derivatives as well as derivatives gains and losses.
David KatzDecember 8, 2006

The Financial Accounting Standards Board wants companies to disclose more details about the effects of derivatives and hedging on their financial statements.

Under a proposal issued Friday, FASB would require companies to discuss their objectives and strategies for using derivatives in terms of underlying risks and accounting designations in using them. The board also wants company disclosures to include tables displaying notional and fair-value amounts of derivatives and gains and losses on derivatives and related hedged items. Further, FASB would require companies to disclose information about counterparty credit risk and contingent features in derivatives.

Overall, the statement represents FASB’s attempt to address complaints that its Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, doesn’t provide enough information to financial-statement users. “The proposed disclosure requirements are intended to enhance understanding of how and why entities use derivatives, how they are accounted for in an entity’s financial statements, and how they affect an entity’s financial position, results of operations, and cash flows,” says Kevin Stoklosa, FASB’s manager for the project.

In issuing the proposal, FASB hopes to get companies to better convey the risks they intend to manage and the added risks they take on by using derivatives. The board also expects the requirements will help clarify how derivatives and related hedged items affect reported amounts on company financials. “Given the complicated nature of derivative instruments and the many different complex hedging strategies used to manage risk, it may be difficult for users to understand the effect derivatives have on an entity’s financial position, results of operations, and cash flows,” adds Stoklosa. “The information required by the disclosures in the proposed statement will enable users to better understand that effect as well as to better compare the effects between different entities.”

If they’re approved, the rules under the proposed statement would be effective for financial statements issued for fiscal years and interim periods ending after December 15, 2007. The proposed statement would encourage but not require disclosures for earlier periods when companies first comply with it. In years after they first comply with the standard, they would be required to make disclosures for earlier periods.

The deadline for written comments on the proposal is March 2. Comments can be submitted to [email protected], and should mention File Reference No. 1510-100.