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In Search of a Little Clarity

The lack of consensus on how to apply FAS 133 tripped up Fannie Mae. Will it trip up other companies as well?

By Duncan Wood | Updated on January 03, 2005

For the past four years–since FAS 133, the accounting standard from the Financial Accounting Standards Board (FASB) that forced companies to mark to market derivatives, took effect–U.S. mortgage giant Fannie Mae has apparently been unjustifiably claiming its derivative hedges qualified for certain accounting treatment. At least, that is what its regulators, the Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission, now have concluded. It will be a costly error since Fannie Mae is now expected to revise downwards its earnings since 2001 by as much as $9 billion as it retrospectively accounts for derivatives losses it had previously reported outside of earnings.

Up until the last, Fannie Mae insisted on its innocence. After all, its accounting had passed several audits, and the shortcut method it used to support its claims is one that was approved by the FASB and is widely popular. Therein lies the problem that could transform a scandal for one company into a cautionary tale for any U.S. company using derivatives.

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