Life in the FAS Lane

Some companies have spent as much as $1 million on software and training to comply with the FAS 133 regulations.
Scott LeibsJanuary 1, 2001

Six months into the existence of FAS 133, the Financial Accounting Standards Board accounting rule that determines how companies must account for derivatives and hedging, one thing is clear: Sorting through new software products may be as time-consuming as complying with the rules.

Deloitte & Touche says there are at least three dozen companies touting software or Web services designed to automate various aspects of FAS 133 compliance, and new players are arriving almost every week. Why? Satisfying the new reporting requirements will be complicated, generating what PricewaterhouseCoopers terms “an unprecedented level of documentation” for each derivative valuation. The Big Five firm recently surveyed Fortune 1,000 executives and found that 60 percent are relying on internal systems to meet these needs, but that 30 percent believe that a mix of internal systems and software or Web services from outside providers will be needed to manage what FAS 133 has wrought.

The new rules, which took effect in the first full fiscal year to end after June 16, 1999, require companies to report all derivatives on balance sheets at full value, and in most cases to record changes in fair value on income statements. Companies must also calculate hedge effectiveness, as well as describe risk management strategies and the rationale for undertaking particular hedges.

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Since most derivatives are privately negotiated, providing historical valuations is difficult. “You can’t look up the information you need, as you can with last quarter’s stock prices,” says David Glassco, CEO of FinancialCAD Corp., in Vancouver. Historical data is only one part of the equation, however; also needed are analytical capabilities that draw on models for pricing, market value, and other aspects of derivatives.

Because those models can vary by industry, and because values change constantly, many companies are offering technological help for FAS 133 in a Web-based subscription model, rather than via shrink-wrapped software.

FinancialCAD’s The Perfect Hedge, for example, is priced at $500 per month per user (plus a $7,500 activation fee and a $500 monthly companywide access fee), and, Glassco says, offers as one benefit “a central record of information maintained over a long period of time, which we can do by offering it as a Web service.”

PricewaterhouseCoopers also offers a Web-based service,, priced between $25,000 and $100,000 a year, depending on how many employees use it. The site allows users to test hedge effectiveness, calculate the fair value of derivatives, produce FAS 133­-compliant reports, and access specialists for additional help.

Such costs can add up. Rhoda Woo, senior manager in the capital markets group at Deloitte & Touche in New York, says that some of her company’s clients have spent as much as $1 million on software and training in order to comply with the new regulations. “I don’t think every company needs this kind of software,” she says. “It depends on how many and what sort of derivatives a company uses. Fair value hedges, for example, are pretty straightforward, but cash flow hedges are quite complex.”

Whether technology can help ease the pain of FAS 133 compliance may be a moot point at some companies. “There’s a lot of head-scratching going on over this,” says Stan Friedman, a partner at PricewaterhouseCoopers. “Some companies don’t even know they have derivatives. They think auditors will provide a solution, but they aren’t allowed to.”

Rob Royall, partner in the national accounting group at Ernst & Young, agrees. “It’s a moving target, complicated by the many interpretations FASB has provided,” he says. “Many companies have held off on preparing for it, and very few have it under control.”

Friedman believes some companies will simply stop using derivatives rather than have to worry about how to report them. But most will simply endure some growing pains as they adjust to a slightly more regulated world.