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New Fair Value Guidance On Measuring Derivatives; More

Tammy Whitehouse | November 1, 2005

In another step along the pathway to fair value accounting, the Financial Accounting Standards Board issued a proposed staff position that seeks to clarify how companies should account for unrealized gains or losses on derivatives measured at fair value.

The guidance addresses a quandary regarding how companies should recognize a gain or a loss for earnings purposes when the value of a particular derivative instrument is difficult to measure based on its liquidity, its age, or both. FASB says different practices have emerged, so it issued the proposed staff position, Accounting for Unrealized Gains (Losses) Relating to Derivative Instruments Measured at Fair Value under Statement 133, to try to streamline methods (see box at right).

The staff position specifies how companies should recognize and measure changes in derivative value when the transaction price doesn’t reflect the fair value. The issue arises when derivatives are traded in different markets where buyers are willing to pay different prices.

Fair value accounting is still a work in progress, so FASB issued the staff position in conjunction with an updated draft of its developing Statement No. 15X on fair value measurements (also above, right). FASB says the proposed guidance on accounting for changing derivative values should be viewed in tandem with the fair value measurement draft to full grasp the Board’s intent; The draft staff position references valuation methods described in the developing statement.

“The working draft standard is the same thing that’s been on the website for the past three years,” said FASB project manager Linda MacDonald. “It’s just repackaged so it’s written better. It shows what the final statement is going to look like.” She said FASB issued the working draft and an accompanying appendix describing its basis for various decisions to help facilitate understanding of the staff position on valuing derivatives.

FASB so far has adopted fair value approaches in a dozen different accounting areas, according to Ed Ketz, an accounting professor at Pennsylvania State University. He’s authoring a book on the emerging FASB’s emerging fair value measurements, chronicling where fair value has already become the law of the land, including in troubled debt restructuring, financial instrument disclosures, debt and equity investments, pension accounting and other post-retirement benefits, derivatives, and certain aspects of business combinations, among others.


Ketz said the updated working draft indicates FASB has been somewhat responsive to comments. “The preparer community and the auditing industry presented a number of objections to the FASB on the exposure draft” of the statement on fair value measurements, Ketz said. “After reading this working draft, I think the FASB has partially responded to some of these criticisms but only partially.”

The staff guidance on derivative valuation will be open for public comment through Nov. 21, and is available from the box above, right.

FDIC Publishes Call For Corporate Code Of Ethics

The Federal Deposit Insurance Corporation has published a reminder to financial institutions to establish an effective internal corporate code of conduct or written ethics policy, a message that rings loud and clear in the executive corridors of public companies as well.

The code or policy is important to provide employees, officers, directors and other agents with clear guidelines on acceptable and unacceptable business practices, FDIC advises. It should include periodic training to assure all employees and officers are aware of their duties and a requirement that they acknowledge their awareness of the code or policy in writing.

The policy should cover the entire organization as well as its subsidiaries and any specific activities unique to the organization, according to FDIC. Compliance should be monitors and violators subject to clear appropriate action to deter further infractions.

The guidance also addresses how employees and officers should interact with auditors and regulators, how assets and records should be protected, avoiding conflicts of interest and other ethics issues.

AICPA Seeks A Voice On Public Company Auditing Issues

The American Institute of Certified Public Accountants is undertaking a project to try to help shape public policy issues regarding auditing for public companies, although the exact nature and objectives of the project remain unclear, even to public company auditing regulators.

At a meeting last week, AICPA’s governing council authorized the board of directors to work with the “public company auditing profession” and others to “implement a new approach to better address public policy issues” related to U.S. audit firms registered with the Public Company Accounting Oversight Board, according to a statement. The group expects to produce a framework that will be implemented by spring 2006.

The AICPA’s professional standards served as the highest and most accepted for auditing in the United States until Sarbanes-Oxley mandated the creation of the PCAOB as a regulator over public company auditing. The PCAOB largely adopted AICPA’s auditing standards on an interim basis while it writes new auditing rules for public company audits.

AICPA, meanwhile, has found its influence relegated more to the private sector. A PCAOB spokeswoman said she was unaware of any AICPA initiative to become more involved in public company auditing.