MBA Releases Guide On Accounting Standard

December 18, 2000

Document Will Help Mortgage Bankers Comply With Complicated ?FAS 133?

WASHINGTON  ? A guide to help mortgage bankers comply with a new standard on derivatives and hedging activities was released today by the Mortgage Bankers Association of America (MBA). The complicated standard, if not properly implemented, could cause significant earnings volatility for mortgage companies, according to MBA.

The product of hundreds of hours of research and discussion by an MBA working group, the guide addresses numerous questions raised by mortgage lenders about what they must do to have their hedging activities qualify for hedge accounting treatment. In simple terms, hedging involves the purchase of financial contracts, or "derivatives," as protection against financial risk.

The new accounting rule, Financial Accounting Standard (FAS) 133? Accounting for Derivative Instruments and Hedging Activities , issued by the Financial Accounting Standards Board?seeks to draw a distinction between the purchase of derivatives for risk-management and speculative purposes. The new standard is effective for "calendar-year" companies on Jan. 1, 2001.

One provision of FAS 133 would require companies to have a documented risk-management policy in place prior to the beginning of a reporting period for hedging activities to qualify for hedge accounting treatment in that period . The importance of this requirement has been emphasized by the Securities and Exchange Commission, which in the past has directed some companies to restate their earnings because their risk-management policies were not completed prior to their reporting periods. Under the new standard, then, companies operating on a calendar-year basis must have a risk-management policy in place by Dec. 31, 2000, for all of their hedging activities to qualify for hedge accounting treatment in their first reporting period of 2001.

Although MBA?s FAS 133 guide will help answer most questions surrounding the new standard, the Financial Accounting Standards Board is continuing to clarify issues related to FAS 133 and will continue to do so after Dec. 31, 2000. The standards board, for example, has yet to finally rule on the circumstances under which loan commitments must be treated as derivatives for accounting purposes.

Copies of the guide can be ordered starting Dec. 26 at the "Books & Publications" section of Shop MBA on the association?s Web site:

Source: Mortgage Bankers Association

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