Oppositions Storm FASB’s Proposed Accounting Standards on Derivatives

Jack Humphrey, Regulatory journalist
May 16, 2011 /

Some of the biggest names in the banking industry have called for the Financial Accounting Standards Board (FASB) to discard its accounting proposals on derivatives, which they believe could only inflate their balance sheets.

The proposed accounting standards published by FASB on January 28 impose mandatory rule on banks to replace the net amounts they used to report in their balance sheets with full derivatives reporting. That would bloat the figures by the trillions, since derivatives are great source of revenue for banks.

Commenting on the proposals shortly after its publication, accounting firm KPMG said companies reporting under the US GAAP are likely to be hit the hardest. According to KPMG, the “proposals would eliminate the exception under US GAAP that allows offsetting for some arrangements in which the ability to offset is conditional and there is no intention to offset or the intention is conditional.”

Credit Suisse, a multinational financial services firm based in Zurich, Switzerland, reported that the accounting proposals would mean S&P 500 companies must report almost $7 trillion in derivatives in their balance sheets if netting is to be discarded.

A major portion of these companies will be composed of such big banks as the Bank of America Corp, JP Morgan Chase & Co, Citigroup Inc, Goldman Sachs Group Inc and Morgan Stanley.

FASB explained that the proposed accounting standards eliminate the differences in offsetting requirements arising from financial instruments reporting under the International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP).

The Wall Street banks expressed strong opposition to the proposals as they believe these would only “exaggerate risks”. According to them, banks have a typical practice of netting or offsetting their derivatives against each other that prevents them from being exposed to gross amounts of losses.

In a letter addressed to FASB, Robert Traficanti, deputy controller at Citigroup, said “the flawed offsetting model” in the proposed accounting standards would only mislead the users of financial reports as they tend to “obscure or create” risks which do not necessarily exist.

The banks added that it would be difficult for them to net the derivatives that are traded on clearinghouses since one of the netting requirements is for derivatives to be simultaneously settled. Typically, derivatives are settled in batches on a clearinghouse during the entire day.


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