Dell, Sun, others seek clarity, Y2K breathing room

Electronic News, May 31, 1999 by Carol Haber

New York-The Financial Accounting Standards Board voted to delay by one year the effective date for implementation of a new derivatives and hedging standard, after receiving pleas from 113 companies, including Dell Computer and Sun Microsystems. Companies cited lack of clarity in requirements of the new standard and major overhauls to their own information systems already undertaken for Y2K.

The effective date was pushed back to fiscal years beginning after June 15, 2000. The FASB cited concerns about the ability of companies to modify information systems and educate managers in time to apply the new standard. FAS 133 was issued in June 1998 and applies to quarterly and annual financial statements.

The new standard is expected to increase investor and creditor confidence and reduce the cost of capital. It is designed to benefit investors and creditors by providing information necessary to assess the effects of a company's use of derivatives and impose consistent financial reporting on the activity. Derivatives are trading instruments that derive their value from the price of something else, such as a price index or interest rate. They usually require little or no up-front investment and create an opportunity for gain or a risk of loss, or both, much greater than the amount of the investment.

At the present time, there are derivatives outstanding with an aggregate notional amount of many billions of dollars that are not reflected in financial statements of U.S. companies. "We typically enter into FX derivative contracts annually with a notional value of $9 billion," said Sun in a recent letter to the FASB.

FASB Chairman Edmund L. Jenkins said: "We have received a number of requests from constituents asking for a one-year delay, based on unforeseen problems with getting systems up to speed for year 2000 considerations. Others had questions about applying Statement 133 in practice and the need to educate their people internally about the new standard's requirements."

In a letter to the FASB, Alton D. Page, vice president and corporate treasurer, Sun, said: "Due to the Statement's rigorous requirements in conjunction with the complexity and breadth of Sun's operations, the only feasible way for us to implement FAS 133 is with a major systems and process overhaul. We simply cannot implement such a system in the time remaining." Y2K was a factor.

James M. Schneider, senior vice president, finance, Dell Computer, referred to lack of clarity concerning hedge effectiveness (another term for the use of derivatives) and difficulty in fully assessing the impact of FAS 133 on risk management strategies. Schneider also referred to a new automated Treasury information system at Dell which is not yet Statement 133 compliant because the vendor is awaiting clarification of the new standard.

Said Tom Porter, assistant project manager, FASB: "Companies are telling us that they didn't recognize until rather recently the extent of information system modifications that would be required to implement FAS 133 and that they have spent so much of their resources on Y2K compliance that they just didn't have the systems resources available to make computer changes to accommodate the new standard. This particular standard can reach very deeply into an organization in the sense that it requires accounting for certain contracts that has never been required before."

A formal proposal to solicit public comment up until June 19 is being issued.

New York