The Financial Accounting Standards Board has voted to propose changes to a derivatives rule issued earlier this year affecting the financial statements of asset-backed and mortgage-backed securities investors.The proposal would affect FASB Statement No. 155, “Accounting for Certain Hybrid Financial Instruments,” and allow companies not to account for embedded derivatives that are associated with prepayment risks. Community banks, insurance companies and others may be exempted from having to recognize interest-rate-driven gains and losses on their income statements. Many of those groups had said without such an exemption, their earnings might be more volatile.
The board issued its Statement No. 133, “Accounting for Derivatives Instruments and Hedging Activities,” in February, which provided additional guidance as to when mortgage-backed securities may or may not be required to be accounted for. The change took effect for a company's first fiscal year after Sept. 15.
There will be a 30-day comment period for the proposed rule. The board expects to vote on the rule in early 2007 after analyzing the issues again in December. The lone member on the seven-person board who voted against revisiting the statement said that he believed the handling of embedded derivatives was made clear in February’s guidance.
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