March 20, 2008

FASB Issues New Derivatives and Hedging Standard

Yesterday, the FASB announced the issuance of Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard amends FASB Statement No. 133, and seeks to enhance disclosure about how and why a company uses derivative and hedging activities, how derivative instruments and related hedged items are accounted for under FAS 133 (and the interpretations of that standard) and how derivatives and hedging activities affect a company’s financial position, financial performance and cash flows.

The Statement is strictly focused on disclosure – it doesn’t revisit any of the thorny issues from FAS 133 such as how to deal with embedded derivatives or the application of the always perilous “shortcut” method of hedge accounting. A central part of the new disclosure will be tables highlighting the location and fair values of derivative instruments in the statement of financial position and the location and amounts of gains and losses on derivative instruments in the statement of financial performance. The two tables (one relating to the statement of financial position and relating to the statement of financial performance) will distinguish between derivative instruments that are designated as hedging instruments under FAS 133 and those that are not. In addition, the information in the tables will require presentation of each major type of derivative instrument – interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts and other types of contracts. The FASB provides illustrations of these new tables in paragraph 3(d) of FAS 161.

The new tables will be accompanied by additional qualitative disclosure about derivative instruments, focusing on how and why the derivatives are used, how they are accounted for and their impact on the company’s finances. The disclosure will be organized around particular risk exposures (interest rate, credit, foreign exchange, etc.), and must distinguish between instruments used for risk management purposes and those used for other purposes.

FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application of the standard is encouraged, as well as comparative disclosures for earlier periods at initial adoption (although such comparative information is not required).

Corporate Hijacking: Something New Under the Sun?

Last week, the SEC announced that it had suspended trading in 26 companies that were involved in “hijacking” the identity of defunct or inactive publicly-traded corporations. Coming out of Enforcement’s microcap fraud working group, these cases are targeted at what Enforcement Director Linda Chatman Thomsen called “a burgeoning problem.”

The modus operandi of the alleged hijackers was relatively simple – they incorporated a new company with the same name as a defunct or inactive publicly-traded company, and then obtained a new CUSIP number and ticker symbol for the securities of the new company by claiming to be officers, director or agents of the inactive or defunct company. One of the companies was traded on the AMEX, while the rest were quoted on the Pink Sheets. Exchange Act Section 12(k) was used to suspend the trading in the companies until March 27th, based on claims that there is a lack of current and accurate information concerning the securities of the companies and trading in the securities of the companies was predicated on apparent misstatements. The identities of the alleged hijackers have not yet been revealed.

While on the topic of fraud: As an aficionado of the classic American genre of entertainment known as the “infomercial,” I have spent many a sleepless night trying to learn the intricacies of real estate flipping, commodity trading and internet-based sales businesses from those always entertaining and informative shows. Therefore, I couldn’t help but notice when the SEC announced a crack-down on a couple of “stars” of the investment infomercial world in a case involving the program called “Teach Me to Trade.” I especially liked how, along with the press release announcing the action, the SEC embedded clips from the TMTT infomercials. My favorite parts of these clips are shots of a guy sitting with his feet up on a table and trading in his socks and the shots of an obviously contrived live studio audience trying to look fascinated about this program. You’ve got to love this stuff!

Pro or Troll #6: Developments with PIPEs

When markets are choppy, PIPE transactions can be an attractive alternative for raising capital. In fact, some large financial institutions have recently obtained capital through PIPE deals, even though they don’t typically call them “PIPEs.”

Test your knowledge of PIPEs with our newest Pro or Troll game.

– Dave Lynn