[9279]
September 26, 1997
TO: ACCOUNTING/TREASURERS COMMITTEE No. 34-97
INDEPENDENT ACCOUNTANTS ADVISORY COMMITTEE No. 5-97
RE: DRAFT COMMENT LETTER ON PROPOSED FASB DERIVATIVES STANDARD
______________________________________________________________________________
The Financial Accounting Standards Board issued an exposure draft Accounting for
Derivatives and Similar Financial Instruments and for Hedging Activities (the "Exposure Draft") on
June 20, 1996. The Exposure Draft related primarily to historical cost based entities that defer
gains and losses on derivatives through "hedge" accounting. While the Exposure Draft
required investment companies to provide additional financial statement footnote disclosure
regarding derivatives activities, it did not modify funds basic financial statements.
The FASB recently issued a "revised draft standard" to interested parties for their views
on the clarity and operationality of the draft. The revised draft standard has been changed
from the Exposure Draft to require that "embedded derivatives" be separated from their "host
contract" and accounted for as a separate derivative instrument. The revised draft standard
indicates that convertible bonds, inverse floaters, inflation indexed securities, and structured
notes are securities which include embedded derivatives. In addition, forward, when-issued,
and "to be announced" transactions are also cited as securities with embedded derivatives.
While it is unclear, the revised draft standard may be read to require separate reporting of
gains/losses attributable to derivatives on the statement of operations. Further, the revised
draft standard may be read to require separate reporting of embedded derivatives in the
schedule of investments (e.g., separate reporting of the fixed-income component and the call
option component attributable to a convertible bond). A copy of the revised draft standard
may be obtained by visiting the FASB web site at www.fasb.org.
The attached draft comment letter argues that separate reporting of embedded
derivatives is unnecessary for investment companies and other entities which use market value
based accounting. The draft comment letter notes that separate reporting of embedded
derivatives may: a) lead to shareholder confusion, b) conflict with SEC rules requiring
disclosure of portfolio holdings, and c) create difficulties in valuing the individual components
of securities with embedded derivatives. The attached letter seeks clarification that separate
reporting of embedded derivatives in the statement of operations and the schedule of
investments would not be required for investment companies and other entities that use market
value based accounting. Comments on the revised draft standard are due to the FASB by
October 14. If you have any comments on the attached draft comment letter please call or e-
mail the undersigned at 202/326-5851 or smith@ici.org by October 8.
Gregory M. Smith
Director - Operations/
Compliance & Fund Accounting
Attachment (in .pdf format)