Monday, November 28, 2005
No Light At The End Of Derivatives Tunnel: Fitch
Fitch Ratings reports the derivatives mess isn't going away. "Fitch Ratings said today that the continuing restatements and financial issues surrounding derivative and hedging activities of US companies are not expected to go away any time soon. Incomplete and inconsistent disclosure of derivative financial instruments by a number of companies, at least partly as a result of the complexity of the rules governing these instruments, continue to raise concern about comparability and uniformity of accounting practices with respect to derivatives."
"'While there seems to be no light at the end of the tunnel to make accounting for these instruments less complex than brain surgery, maybe help is on the way through better disclosures that can help investors understand the risk better,' said Raja Akram, Senior Director of Credit Policy at Fitch Ratings in New York."
"In the current year, giants such as American International Group Inc. and General Electric Co. have fallen on the SFAS No. 133 sword through painful admissions of running afoul the accounting rules. From the analysts' perspective, Fitch notes that it is difficult to assess whether such restatements signify any underlying problems in the companies' risk management. These two companies join hundreds of others within the past year that have restated their financials for misstating results. Such restatements make financial statements more confusing and complex to investors and analysts alike."
"'Given the complexity of current accounting rules, Fitch believes that financial statement disclosures should clearly address both the accounting and the economics impacts of derivatives. 'The best solution at the current time appears to be better and informative disclosures,' said Akram."
"Fitch has previously addressed the need for better disclosures in its report dated November 9, 2004, 'Hedge Accounting and Derivatives Study for Corporates, Disclosure, Hedge Accounting and Restatement Risk' in which it has recommended that companies should move beyond, current, bare-bones disclosure requirements."
"'While there seems to be no light at the end of the tunnel to make accounting for these instruments less complex than brain surgery, maybe help is on the way through better disclosures that can help investors understand the risk better,' said Raja Akram, Senior Director of Credit Policy at Fitch Ratings in New York."
"In the current year, giants such as American International Group Inc. and General Electric Co. have fallen on the SFAS No. 133 sword through painful admissions of running afoul the accounting rules. From the analysts' perspective, Fitch notes that it is difficult to assess whether such restatements signify any underlying problems in the companies' risk management. These two companies join hundreds of others within the past year that have restated their financials for misstating results. Such restatements make financial statements more confusing and complex to investors and analysts alike."
"'Given the complexity of current accounting rules, Fitch believes that financial statement disclosures should clearly address both the accounting and the economics impacts of derivatives. 'The best solution at the current time appears to be better and informative disclosures,' said Akram."
"Fitch has previously addressed the need for better disclosures in its report dated November 9, 2004, 'Hedge Accounting and Derivatives Study for Corporates, Disclosure, Hedge Accounting and Restatement Risk' in which it has recommended that companies should move beyond, current, bare-bones disclosure requirements."
# posted by Ben Jones @ 10:47 AM 
