Firms may have to reveal derivative dealing

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The Independent Online
Companies will be required to disclose the extent to which they are using potentially ruinous derivatives and other financial instruments if proposals published by the Accounting Standards Board today are accepted.

The plans, contained in a discussion paper, form half of a concerted attack on a complicated area of accounting. The board is optimistic of being able to introduce a standard on disclosure in a few months. But it acknowledges that producing a standard on the other half of its attack - dealing with measurement and hedge accounting issues - could take several years because it is much more complex.

Sir David Tweedie, chairman of the ASB, said his body wanted to move urgently on disclosure because companies could be destroyed by making significant use of derivatives and readers of their accounts would know nothing about it.

The proposals are largely consistent with those already required in the US and under international accounting standards.

Financial instruments include non-derivatives, such as loans, bonds and borrowings, and derivatives, such as swaps, forward contracts and options.

Derivatives can cause great problems because they are easily acquired, often at a minimal cost, and their values can change rapidly, as has been seen in such cases as the Orange County bankruptcy and the loss at the German commodities group Metallgesellschaft.

The ASB recommends that the disclosures be included as part of the Operating and Financial Review, rather than published as a separate entity, on the grounds that that would lead to bland statements.

While it has had an encouraging reaction from auditors and users of accounts on disclosure, the board is expecting strong protests over measurement and hedge accounting.

By recommending a current-value rather than a historical cost approach, the board is calling for a fundamental change to current practice.

In recognition of this, the board has described the proposals as "tentative" and given interested parties until 31 October to comment.

Gerry Acher, head of audit and accounting at KPMG and chairman of the Institute of Chartered Accountants' audit faculty, confirmed the board's suspicion that practitioners would object to the approach to hedges, saying: "We are not convinced that the problem warrants the radical solution which the ASB suggests."

However, he was supportive of the disclosure proposals, and endorsed the board's view that they should be deemed best practice in this country and adopted voluntarily without delay.