Financial Accounting Standard (FAS) 133, the accounting rule adopted in 2001 applying to derivative instruments and hedging activities, has already been the main culprit behind no fewer than 200 corporate restatements. Now, as companies are gearing up to comply with two new accounting rules relating to the fair valuation of assets and liabilities, all finance executives can say is, "Here we go again."Experts in derivative accounting, like Jiro Okochi, CEO of Reval Inc., predict that FAS 157 and 159 may turn into FAS 133-like migraines and then some. The fair value rules carry their own inherent volatility because they require assets and liabilities to be valued at current marketprices. This is compounded when the prospect of frequent restatements is added.

What may present the greatest challenge and risk to companies using derivatives, with regards to FAS 157 and 159, is the inclusion of a counterparty's credit along with the company's credit rating under fair value, explains Reval's Okochi, whose recently recapitalized company provides software-as-a-service (SaaS) solutions for compliance with FAS 133, and is adding a FAS 157 module. Since derivatives are fair-valued under FAS 133, they should also be fair-valued under FAS 157 under the method prescribed, Okochi explains. That method calls for liabilities to have their company's credit risk included in the calculation. Okochi gives the example of a company that owes $5 million on the valuation of an interest rate swap. "If [your company credit rating] was a single- or double-A when you first priced the swap and now you're a triple-B minus, the fair value measurement of this liability will be lower because you might not be able to make good on the transfer price of that swap," he says. "It's a paradox that if your credit rating goes down, the fair value of a liability goes down and conversely, if your rating goes up, your liability would increase."

On the positive side, the new rules set a standard for arriving at fair value, and that might "get rid of some of the noise from FAS 133," as one accountant puts it.