Accounting for derivatives has never been easy, but the Governmental Accounting Standards Board has proffered some thoughts on how it might be done, and 85 concerned industry professionals generally agreed - but not completely.GASB project manager Randy Finden said that the bulk of the board's complex preliminary views document could be boiled down to two sentences: "Put all derivatives in the balance sheet at fair value. Fair-value changes will be reported as gains and losses in income, except for hedging gains and losses, which will be reported on the balance sheet as deferrals."
That sounds nice and simple - until you remember that the issue is derivatives, those multi-faceted, definition-defying instruments that evolve as fast as anyone can set standards for their treatment.
Generally, the comment letters supported the idea of reporting most derivatives on the balance sheet at fair value, but many balked at the added burden of accounting.
James A. Johnson, director of accounting standards at Big Four firm Deloitte & Touche, praised the proposal but, comparing it to Financial Accounting Standards Board Statement 133 on derivatives, he held back from full support. "I suspect GASB was attempting to improve the '[better] mousetrap' built by FASB," Johnson wrote to the board. "Have you succeeded? In my view, the answer is, 'No.'"
Johnson said that practitioners will face the same problems that corporate accountants confront in Statement 133, but he "vigorously" supported the conclusion that derivatives be reported at fair value on the balance sheet.
Joe Christensen, Utah deputy state auditor, acknowledged that derivatives are "complicated and confusing," but seemed to shudder at a statement that would be equally so.
"We are not convinced that the accounting standards for derivatives need to be just as complicated as the derivatives themselves," Christensen said. "We question if the typical CPA, either on the preparers' or auditor's side, will be able to adequately understand and follow this statement."
While agreeing with fair-value reporting on the balance sheet, Christensen did not think it necessary that "change in fair value for derivatives used for hedging [be] reported as deferred charges or credits."
Urging limits on fair value
The Government Financial Officers Association is a little less comfortable with GASB's suggested standard.
"We support the proposal to require that derivatives be reported at fair value in financial statements that use the economic resources measurement focus and the accrual basis of accounting," the association's letter stated. "However, we believe that fair-value reporting in this case is fundamentally at odds with the current financial resources measurement focus and the modified accrual basis ... . Consequently, we urge the board to limit the use of fair-value reporting to the former, consistent with the dual approach to accounting for governmental activities/governmental funds."
The letter went on to agree with the proposal that effective hedges be reflected only on the statement of position.
The Bond Market Association and the International Swaps and Derivatives Association issued a joint letter that led off by stating that the disclosures model presented in GASB Technical Bulletin 2003-01 already provided a meaningful basis for disclosure. The letter then went on to discuss the appropriateness of fair value as a measurement attribute.
The associations' letter was most concerned about the burden of applying hedge accounting to virtually all derivatives.
"Given the costs and complexities of applying hedge accounting, there is concern that the assessment requirements may cause users to not enter into derivatives and not hedge real economic risk," the letter explained. "Therefore, we recommend that if GASB's preferred model is the deferral method, that such method be required for all hedges, without the burden of meeting the hedge accounting requirements, but that entities may elect to record changes to the change statement."
Too much to handle?
Confusion and an increased burden of accounting were mentioned in a few letters.
The Commonwealth of Virginia introduced its letter with complaints about confusing language, then said that the proposed disclosures would "make the notes to financial statements voluminous and foreboding."
GASB's Finden said that the board expected just such a variety of comments, and for that reason issued a preliminary views document before tendering a more established exposure draft.
With plenty to redeliberate, the board hopes to issue an exposure draft late in the first quarter of 2007. Finden said that it is too soon to predict when a final statement might be issued.
