The Government Accounting Standards Board this week will examine the pre-draft ballot for new regulations for derivatives accounting standards, marking the first time the board will see the entire document.
Randal Finden, GASB's manager of the project, spoke at The Bond Buyer's Eighth Annual National Municipals Derivatives Institute and explained the new standards. He said the board will take a look at the document, work through any discrepancies, and then vote on it June 12. Barring any major changes, the new standards should be issued by the end of June, he said.
The standards seek to clarify the fair value accounting for derivatives hedging. Fair value is defined as either the value of the derivative's future cash flows in today's dollars or the price it would fetch if it could be sold on an open market.
The proposal centers on GASB standards for determining whether a derivative is an effective hedge and whether it would qualify for hedge accounting. Finden said several changes have been made in recent months in response to questions from market participants.
Among the changes, GASB added a section about how to apply the accounting principles to hedged debt that is refunded. In this case, the gain or loss from the transaction will be included in the gain or loss calculations attributed to the refunded bonds.
The standards will also allow a number of different quantitative methods to be used for judging whether a hedging transaction has to use these standards or not, including regression analysis, volatility reduction methods, or the synthetic instrument method. This method uses the combined cash flow of a swap and hedged debt to create a third instrument or a synthetic fixed-rate instrument, Finden said.
When the standards are released, GASB will also release an accompanying document to help issuers understand how to apply the new standards. If the board approves the document at its June 12 teleconference, the effective date would be periods beginning after June 15, 2009, meaning that for most issuers the 2010 fiscal year would be the first to employ these standards.
