But it's a daunting task to essentially review all the hedges you have put on over the last five years and correct what you thought was okay. It would have been simpler if the rules had been changed so companies could more easily adjust what had been done before, rather than going back to square one. For instance, simply eliminating the shortcut entirely would have made the treasurer's job easier and less politically sensitive.
T&R: How has strict enforcement of hedge accounting rules changed the use of derivatives?
Okochi: For the most part, we are not seeing a decline in hedging activities or a major change in hedging strategies. Most of the scrutiny is around FAS 133′s shortcut and critical terms match. These were intended to benefit basic hedging strategies, like swapping debt to fixed or floating rates. Companies realize they can't suddenly stop hedging core activities because it injects too much uncertainty. Instead, they are being forced to take the time to understand the various long-haul methods, like regression. At the end of the day, the death of the shortcut doesn't mean you can't hedge–it's just going to be much more time consuming.
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T&R: With less reliance on shortcut hedge accounting, FAS 133 looks more like IAS 39. Do you foresee one global standard?
Okochi: On paper it makes sense to have one global standard, and with stock exchanges merging globally, shareholders should be able to compare apples to apples with all public companies. However, if the U.S. and Canada can't even have the same standards, then it's hard to envision how total unification can occur globally.
T&R: How is FAS 157 going to impact FAS 133?
Okochi: FAS 157 is the new standard around fair value that takes effect November 15. Yet, most companies are not prepared. In a nutshell, companies will have to report the true unwind or "exit" price of assets and liabilities currently being marked to market, not the theoretical or entry price. This implies that companies will have to incorporate credit and liquidity values. Companies will also have to designate the reliability of the valuation into three buckets.
As derivatives are currently being valued under FAS 133, FAS 157 should be applied. The impact is not entirely clear yet, but it will probably cause ineffectiveness as the derivative fair value may be adjusted by the counterparty credit risk; a hedged item may be left untouched. This will put additional stress on hedging activities and compliance with FAS 133 and even on those who simply chose to mark-to-market their derivatives. It is another clear statement for the drive for more independence and transparency in financial statements. With ongoing re-implementation of FAS 133, the impact of FAS 157 may be a rude awakening for those who have not yet begun to review their current methods for fair valuation.
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