The Securities and Exchange Commission approved rules requiring companies to reveal more about their accounting policies for derivatives in the footnotes of financial statements. The rules also require new disclosure of information about the risk of loss from market rate or price changes that are inherent in derivatives and other financial instruments.
SEC Chairman Arthur Levitt, Jr., told reporters the rules build on generally accepted accounting principles and give investors tangible, quantifiable information about derivatives and their potential consequence for a company's financial position.
Small companies and registered investment companies are exempt from the new requirements. The rules, which will be phased in over the next few years for quantitative and qualitative disclosures, are effective for filings after June 15, 1997, for banks, thrifts and companies with market capitalization over $2.5 billion. Large commercial companies with December 31 yearends must comply by December 31, 1997.
What companies must do
In general, the rules require enhanced descriptions of accounting policies for derivatives in financial statement footnotes and quantitative and qualitative disclosures about market risk outside the financial statements. The rules also remind registrants to supplement existing disclosures about financial instruments, commodity positions, firm commitments and other anticipated transactions with related disclosures about derivatives.
The rules allow companies providing quantitative market risk information to choose from three methods of presentation.
* Tabular presentation of fair value information and contract terms relevant to determining a company's future cash flows, categorized by expected maturity dates.
* Sensitivity analysis of the potential loss in future earnings, fair values or cash flows of market risk sensitive instruments due to hypothetical changes in interest rates and other rates or prices.
* Value at risk disclosures of potential loss in future earnings, fair values or cash flows from market movements, including their likelihood of occurrence.
Stephen M. Swad, SEC deputy chief accountant, told the Journal that the three alternatives should help quell the concerns of companies that the disclosures would reveal...