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SURVEY FINDS CONSISTENCY IN DERIVATIVE ACCOUNTINGIt suggests that complete overhaul of accounting rules are unnecessary.

According to a survey of financial and nonfinancial organizations that use derivative instruments in conjunction with risk-management activities, there is consistency in the accounting for risk management activities. The survey, which was requested by the staff of the Financial Accounting Standards Board, revealed that there is consistency in how organizations currently account for the four primary types of derivative instruments (futures, forwards, swaps, and options). More than 90% of survey respondents match the accounting of these instruments with the economics of the transaction by recognizing the effects of the derivative instrument at the same time as the hedged item.

In addition, 96% of respondents require correlation between the effects of the derivative and the hedged item, while 91% require the derivative to be linked to specific assets or liabilities or homogeneous pools. Moreover, 99% of those surveyed reported that they require that derivative instruments be designated and documented as relating to a particular risk management strategy in order to qualify for risk management accounting.

While the vast majority of organizations responding require a specific assessment of the risks being managed for derivative instruments to qualify for special treatment, practice varied in the criteria organizations use to define and evaluate risk and the business levels at which risks are measured.

The FASB exposure draft on derivative accounting, which would significantly affect reporting for derivatives and hedges, attempts to simplify what the FASB believes are diverse and complex current practices. Given the broad consistency on the basic approach to accounting for risk management activities, only 18% of those responding believe that the FASB exposure draft would be an improvement over current practice. Eighty-six percent of respondents prefer to continue to utilize the current risk management accounting practices, although there was recognition that some modifications are needed.

Responses to the survey were directly received by KPMG Peat Marwick from 139 organizations. The survey was sponsored and developed by Citicorp and J.P. Morgan, and sent to nearly 700 financial and nonfinancial organizations in order to obtain information about current risk management accounting practices from a broad representation of derivatives users. The survey was distributed in coordination with various organizations, including the Financial Executives Institute, the Institute of Management Accountants, the Treasury Management Association, the Securities Industry Association, the International Swaps and Derivatives Association, the American Bankers Association, the Committee on Bank Accounting and Reporting, and the New York Clearing House Association.

Copies of the survey report may be obtained by contacting Frank Taylor or Mary Migacz at KPMG Peat Marwick at (212) 909-5600 or fax (212) 909-5699. *

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