Despite this, FASB's Lott, who authored the paragraph himself when the rule was being drawn up in the late 1990s, says that his intention was never to create a forex equivalent of the shortcut. The paragraph makes a reference to "matching terms" in forex hedges, he says. "But what I had in mind when talking about matched terms was not a separate method. All we were trying to say was 'look, if you get your derivatives and the terms are the same as the thing you're trying to hedge, then it's not very difficult to get effectiveness.' It was just an observation [about forex]."

Now, FASB's board will decide whether to stick with Lott's interpretation, or to bow to market convention. Lott says he "can't predict the outcome" of the project, but he acknowledges that, when the issue was discussed at a January 31 board meeting, there was at least one FASB board member who believed that the standard should allow the FX shortcut.

Many companies will be fervently hoping that Lott's original intentions are not upheld by FASB. "To date, the accounting rules have not been an obstacle to us managing financial risk in a way that we think makes sense for us as a company," says one dismayed assistant treasurer at a Fortune 100 technology company, who asked to remain anonymous. "But if these challenges are upheld, it would make it more difficult for us to manage risk in the way we currently do. If these changes go through, they're not going to lead to better financial reporting by U.S. companies. All that will happen is a further reduction in the efficiency of U.S. business and an increase in the cost of being a public company in this country."
The fundamental problem, says Reval's Okochi, is that both the shortcut and the critical terms match method apply to basic hedging techniques. "This isn't a rule that relates to some rarely used, exotic product. It relates to basic, plain vanilla hedging. Changing the way the shortcut was implemented had a wide impact on interest rate hedgers. Changing critical terms matching would have an even wider impact on foreign exchange and commodities," he says.

So is it time to sound the death knell for shortcut hedge accounting on both the interest rate and FX side? In fact, a safe path through this section of the standard appears so uncertain that many auditors are now advising companies to stop using it altogether, says FXpress Corp's Richardson: "Most of the auditors that we've been in contact with are insisting that their clients use long-haul testing instead."

Some treasury executives aren't waiting for advice from their auditors. Instead, they're beginning to seek out another, more balanced approach to the issue–one which considers the accounting treatment, but does so as just one of a range of inputs to the overall hedging policy. "Hedging and hedge accounting should be viewed as related, but somewhat independent, decisions," says Fred Schacknies, North America treasury director at the newly merged Alcatel-Lucent's U.S. headquarters in Murray Hill, N.J. "Although both involve trade-offs of risk and reward, you can identify an optimal position after thorough analysis."

When the company first faced the apparent need to implement hedge accounting, Schacknies launched an analysis of how Lucent Technologies Inc.'s risk profile and reported earnings would have changed under various hedge accounting scenarios. "We found that the accounting treatment would not have had a material impact–and was unlikely to have one in the future," he says.

The team–under North American treasurer Denise McGlone–then began applying a similarly hard-nosed, rigorous approach to the hedging policy as a whole. This kind of process has to begin with a clear statement of the hedging policy's aim, says McGlone: "Are you trying to reduce the volatility of cash flows, the volatility of earnings? What level of FX visibility is required? Corporate level or all the way to the project level? How important is efficiency and the costs of infrastructure required to support the hedging program?"

From that starting point, companies can go on to identify the various components that influence the success of the policy's aims: At its simplest, this might mean assessing the risk reduction achieved by a single option trade. But the net has to be cast much wider, says Schacknies: "Traditional decision frameworks tend to focus on the net exposure achieved after hedging at a transactional level. A holistic corporate approach should look at the incremental effects of those decisions for the corporate in terms of both cash and earnings."
In other words, companies should be looking not just at the risk reduction achieved by a hedge, but at the cost of putting that hedge on–and, more importantly, at how those decisions stack up across the entire enterprise. Companies who do this could find a pleasing outcome, he says: Achieving the most cost-effective reduction of risk might not involve hedging as much as they think. It also might mean not worrying about FAS 133 quite as much as they currently do. "The job of the strategic treasurer is to manage risk to tolerable levels in the most cost-effective manner possible," says McGlone. "It's not about eliminating all risk at any price. It's about getting the biggest risk reduction, the biggest bang from every dollar you spend."