The International Accounting Standards Board made its most controversial proposals for derivatives accounting more palatable to this industry last week at a meeting in Rome. The IASB will bring revenue recognition rules more in line with U.S. GAAP and give accounting recognition for macro hedging, according to Wayne Upton, research director in London.
The IASB has relaxed its position on derivatives houses taking up-front profits when they sell a product in one market and hedge it in another. The previous draft would have made it extremely difficult to take up-front profit because the firms would have had to mark both the product and hedge at the price it transacted, said Charlotte Jones, partner at Ernst & Young in London. Upton, however, said, "The number of circumstances where you can take front end profit will be very limited."
In addition, the accounting board has come up with a new proposal for portfolio hedge accounting. "This is an approach that has not been explored before," said Upton. It allows a bank to use a mixture of assets to hedge liabilities. For example, a bank can bundle up a pool of credit cards and mortgages receivables to hedge exposure to interest rates, noted Upton. He described this proposal as meeting most of the banks concerns without bending the IASB's proposals. "This solves some of the problem for some of the people," added Upton.
Peter Jeffrey, partner at PricewaterhouseCoopers in London, said that due to time pressures, major changes are unlikely before this draft is introduced.
