Fitch Ratings released a survey calling for increased disclosure in the derivatives market after it found companies had miscalculated their leverage due to the complexity of hedge accounting. The survey's findings are based on a credit study of 60 global corporations including Cox Communications and IBM Corp.
"IBM's leverage is artificially inflated because of hedge accounting for derivatives," said Roger Merritt, managing director in Fitch's credit policy group. On the flip side, in a different interest rate environment, IBM's leverage could be understated for the same reasons related to hedge accounting, he said. "Investors need to be able to adjust out the artificial effects of hedge accounting to determine true economic leverage."
"Especially with short to medium term volatility in things like interest rates, commodities and currency prices, these effects could become more pronounced and so more important to understand," explained Joe St. Denis, a senior director at Fitch.
Greater disclosure would allow analysts to make better comparisons of companies across time and in the same sector because they would be able to adjust out volatility related to hedge accounting, Merritt said. "With the inevitable surprise in the market, investors should be able to act rationally because they have the appropriate information."
