1 Concurrent with the release of the Exposure Draft, the FASB issued for comment a separate proposal, Reporting Comprehensive Income. This proposal would require all non-owner
changes in equity currently reported in the equity section of the balance sheet (e.g., adjustments to minimum pension liabilities (FASB Statement No. 87), unrealized gains and losses pertaining to
available for sale securities (FASB Statement No. 115)) to be presented as a component of comprehensive income. Comprehensive income would represent an overall measure of enterprise
performance and would include both net income and any other comprehensive income.
October 15, 1996
TO: ACCOUNTING/TREASURERS COMMITTEE No. 41-96
INDEPENDENT ACCOUNTANTS ADV. GROUP No. 9-96
RE: INSTITUTE COMMENT LETTER ON FASB EXPOSURE DRAFT
______________________________________________________________________________
The Institute submitted the attached comment letter to the Financial Accounting
Standards Board on the exposure draft Accounting for Derivative and Similar Financial Instruments
and for Hedging Activities. The Exposure Draft relates primarily to historical cost based entities
that defer gains and losses on derivatives through "hedge" accounting. Accordingly, the
accounting provisions of the exposure draft are not relevant to investment companies.
Nonetheless, the Exposure Draft would require investment companies to provide additional
financial statement footnote disclosures regarding their investments in derivatives. In
particular, investment companies would be required to disclose the amount of gains and losses
on derivatives during the reporting period disaggregated by class. Also, the Exposure Draft
would broaden the definition of a derivative financial instrument to include structured notes.
The Institutes comment letter questions the value of the proposed gain/loss disclosure by class
of derivative and argues that gain/loss disclosure at the fund level, which is currently provided
in the statement of operations, is more relevant to investors.
The Exposure Draft would dramatically change the way historical cost based entities
report derivatives transactions and hedging activities. The Exposure Draft would require such
entities to recognize all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are met, a derivative
may be designated as one of three types of hedges. "Fair value hedges" would result in the
recognition in income of changes in the fair value of the hedged item to the extent the change in
value of the hedged item offsets the gain or loss from the derivative. Changes in fair value of
derivatives designated as "cash flow hedges" would be recorded in "other comprehensive
income."1 For a derivative designated as a "hedge of the foreign currency exposure of a net
investment in a foreign operation," the portion of the change in fair value equivalent to foreign
currency transaction gain or loss would be reported in other comprehensive income; any
remaining change in fair value would be recognized in earnings. For a derivative not
designated as a hedge, the change in fair value would be recognized in earnings in the period
of change.
The Exposure Draft would supersede FASB Statement No. 80, Accounting for Futures
Contracts, FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-
Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and FASB
Statement No. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments. It would amend FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, to be consistent with the measurement provisions of the Exposure Draft and to
include in Statement No. 107 the disclosure provisions about concentrations of credit risk from
Statement No. 105. The Exposure Draft would be effective for fiscal years beginning after
December 15, 1997.
Gregory M. Smith
Director - Operations/
Compliance & Fund Accounting
Attachment