A recent independent survey of senior executives at Fortune 1000 companies, sponsored by PricewaterhouseCoopers, found that many companies have considered altering their use of derivatives because of new requirements in SFAS No. 133.
SFAS No. 133, adopted in June 2000, requires that a company report all derivatives on its balance sheet at fair market value, describe its risk management strategies, detail the reasons for undertaking a particular hedge, and calculate a hedge’s effectiveness.
“Many companies find themselves facing the great unknown,” said Stan Friedman, CPA, chair and CEO of Solution 133.com, LLC, which conducted the study for PricewaterhouseCoopers. “Senior executives clearly have a great deal of apprehension about the impact of SFAS No. 133 on their day-to-day business operations and hedging strategies. Moreover, there is related concern that SFAS No. 133 will result in greater volatility to earnings and stock prices.
“If you have a December 31 year-end and haven’t implemented SFAS No. 133, then you have lost hedge accounting. There’s no way to go back and fix it,” Friedman said. “If you did implement SFAS No. 133, then you must document hedges and select a hedge effectiveness test. In general, advisors should meet with their clients to make sure that their documentation and level of testing comply with SFAS No. 133.”
The survey results reflect an increasing concern that SFAS No. 133’s requirements expose a company to an unprecedented degree of outside scrutiny. It also reveals the following:
“There has been considerable debate about how SFAS No. 133 will alter the derivative landscape and what its final impact will be on relations between companies and their investors,” Friedman said. “In some cases, compliance with SFAS No. 133 will require a one-time transaction adjustment, perhaps resulting in multimillion dollar charges against net income. In today’s volatile market, investors may view such fluctuations negatively and manage their portfolio accordingly.”
A copy of the report, “Tackling FAS 133: Implications for Corporate America,” is available at www.solution133.com.
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