The Financial Accounting Standards Board is going to change the definition of what constitutes a derivative to prevent corporates putting funding gains in the operating section of their balance sheet. The change, which is part of an amendment due out later this month, will separate the funding element of derivatives, according to FASB official, who declined further comment.
The amendment is designed to split out derivatives with clear financing aspects, rather than derivatives that have an embedded financing element due to the shape of the yield curve. For example, if one of the parties in the derivatives makes a net payment in the early stages in return for payments in the later periods, this can be seen as financing and would have to be put in the funding section of the balance sheet.
"This puts cash flows where they belong," said one derivatives accountant. The change is important because many investors look at operating income as a measure of a company's health and a one-off gain from financing could distort the picture.
