By John Thackray

Just in time for Easter, a new player in the debate on derivatives accounting threw its hat into the ring. The London-based International Accounting Standards Committee (IASC), along with the Canadian Institute of Chartered Accountants, issued a discussion paper loaded with radical suggestions on how companies should account for all financial instruments. In essence, the document called for an approach that the U.S. Financial Accounting Standards Board (FASB) embraced, then backed away from-marking-to-market all derivatives and their offsets. The document asserts that "all gains and losses arising from changes in the fair value of financial assets and liabilities are income and should be recognized as income immediately when they arise."

Never mind the yo-yo effect on reported income, which is the chief objection of U.S. preparers to this approach. "Everything is moving toward fair value accounting for instruments," says the IASC's Kurt Ramin, on leave from Coopers & Lybrand. Well, not quite. FASB's current derivatives exposure draft, which merely flirts with aspects of fair value treatment, provoked howls of protest at public hearings in Norwalk, Conn. last summer.

IASC may be a little out of touch with U.S. politics, but it is not an organization of starry-eyed idealists. "It's the United Nations of accounting," says Ramin, referring to its 80 members, including the Financial Executives Institute, the American Institute of Certified Public Accountants and FASB itself.

Nor is it without power. Its pronouncements are accepted by the International Organization of Securities Commissions, the group that regulates cross-border stock listings. In order to qualify for cross-listings next year, companies will be under pressure to heed IASC's guidelines, which were discussed in mid-April by its board and form the basis of an exposure draft that is likely to be adopted by the fall.

For most of its 20-year existence, the world has heard little from the IASC, but with the increasing globalization of equity markets-and better staffing-it has been taken more seriously in the last couple of years. Countries without accounting standards, or with inadequate standards in some areas, have found it convenient to adopt some from the IASC's inventory of 30 standards.

Although the radicalism in its just-released 200-page Discussion Paper on Accounting for Financial Assets and Financial Liabilities certainly will not capture the hearts and minds of U.S. preparers, it is possible that they will make friends and influence people in countries like Australia and France-two that have adopted IASC's line in the past.

Although it proposes that all variations in the fair market value of financial instruments be reflected immediately in income, the IASC document allows two exceptions. Gains and losses on hedges of anticipated transactions may be segregated from the P&L and put into a statement of other comprehensive income. The same applies for gains and losses of hedges of investments in foreign entities.

The IASC's Procrustean radicalism has the merit of being less complex than the current Rube Goldbergesque FASB proposals. But according to FASB board member Jim Leisenring, one of the document's drawbacks is that it offers little assistance on methodologies for marking-to-market. "There is no measurement guidance," notes Leisenring, who attended some of the IASC's deliberations. "What price should assets be carried at? Average prices, bid prices, asked prices, entry prices? They don't tell you. Their press release has a lot of hype. You'd think they'd found Rumpelstilskin [sic] but the fact is they have a long way to go."

Even the fiercest critics of federal power give sacred cow status to the Securities and Exchange Commission (SEC). But lately the SEC seems to have provoked an unusual amount of flack and made new enemies with its latest regulations for derivatives exposures in corporate annual reports. When in draft form these proposals provoked a storm of protest from preparers' overwhelmingly unfavorable comment letters. The agency put some sugarcoating on the rules and went ahead anyway.

And there the story should have ended, except for Senator Phil Gramm (R-Tex.), chairman of the Subcommittee on Securities of the Committee on Banking, Housing and Urban Affairs. Gramm seems to think that there is some political advantage to be gained in the arcane field of derivatives accounting. First, he held a hearing on March 4 in which critics outnumbered supporters of the new rules. Two weeks later, he had aides leak a story that he was on the verge of demanding that the SEC go back to the drawing board and do a more thorough job of assessing the cost impact of the rules on the corporate community.

At the hearings, SEC commissioner Steven M.H. Wallman went to some length to explain that the agency had indeed carefully considered this aspect of the regulations. One advantage of the three alternative treatments of quantitative data on derivatives exposures (tabular presentation, sensitivity analysis or VAR) would allow preparers to select the cheapest, which for many would be the tabular form. He also pointed out that most large financial institutions would not be additionally burdened since they already prepare similar data for their regulators and for internal risk management purposes.

$8,000 was his estimate of compliance costs for the average registrant, which over a population of 5,000 companies would tally to $40 million-a figure that could be reduced as companies develop better risk management software for the job.

"Boilerplate" was Gramm's dismissive epithet for the testimony. "It was not well done. It was not well thought-out." An aide to Gramm added: "The members of the committee felt that Wallman did not do an effective job defending the SEC position. He swung and got a lot of air."

Subsequent to the hearings, committee staffers in talks with the SEC have claimed that this impact analysis falls far short of the 1996 National Security Market Improvement Act (Section 106), in which the agency must take into account its rules' impact on competition in capital formation. Committee staffers were cheered to find a report by the SEC's chief economist that was critical of the rule, claiming that the benefits would not exceed compliance costs.

Believing the testimony of those who say that the SEC's $8,000-per-compliance number would be anywhere from 10 to a 100 times greater in real life, Gramm's agenda is to pressure the SEC to abandon the hard quantitative aspects of the disclosure rules and retain the softer qualitative requirements. Says a Gramm aide: "We are confident that when the SEC actually does a proper analysis and actually goes out and researches the true costs to companies-not just vague 'guestimates'-that they will see the need to make changes."

And what if it doesn't? Gramm and his allies say they might try and invoke the Congressional Review Act, which permits Congress to void the proclamations of agencies. Still, it seems unlikely that Gramm will try such a grandstand play. To gore the sacred cow over such a politically dull topic as derivatives accounting might look a little silly.