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The Congressional FASB Ambush

Road warriors from the Financial Accounting Standards Board left their comfortable Connecticut haven on October 1 and walked straight into a Congressional ambush. At the hearing, called by the House Subcommittee on Capital Markets, Securities and Government-Sponsored Enterprises, 13 congressman called FASB and the SEC to delay the accounting board's rules on derivatives disclosure.

After being buffeted by almost 90 minutes of hostile questioning, Ed Jenkins, FASB's gritty new chairman, appeared shaken, but not undaunted. "I wouldn't describe it as a good time, [but] the questions we received, although not particularly supportive, were still ones we'd heard before,” Jenkins told a reporter after the ordeal.

Opponents of FASB's plan were swift to characterize the grilling Jenkins and SEC chairman Arthur Levitt received at the hands of the subcommittee as a defeat. "They did not go in there expecting what they got, and it was probably an even worse day for (the SEC),” said one attendee. "Not one of those (representatives) arrived or left with a favorable view of the FASB proposal.”

Supporters of the plan, by contrast, said that critics had failed to regain the momentum, which has improbably swung FASB's way in recent weeks. After the Congressional hearing, which one FASB official described as "grueling,” the future of the FASB proposal remains balanced between three options: implementation in late 1998, a rewrite of the plan under Congressional duress or a compromise deferment of implementation for a year.

In the hearing, old complaints of a standard-setter out of touch with the rest of the world were dropped in favor of a new pitch to the great American consumer, to whom FASB was painted as an enemy, passing edicts well beyond its standing.

Rep. Paul Kanjorski (D-Pa.) outlined the threat the new proposal would pose to Pennsylvania-based Hershey Corp. He claimed that as a listed company, Hershey would be forced not only to incur the costs of additional accounting for derivatives, but also to regularly expose its positions as they relate to the hedging of cocoa, for example. The implication was that unlisted rivals such as Mars and foreign-owned competitors such as Néstlé would be able to use all their muscle to trade against Hershey in the appropriate futures markets.

"I wouldn't describe it as a good time, [but] the questions we received, although not particularly supportive, were still ones we'd heard before.”
Ed Jenkins
FASB chairman

Jenkins denied the assertion that FASB poses a serious threat to American chocolate eaters. "We've had a lot of contact with Hershey and have listened to its concerns and proposed solutions to those concerns,” he said. "However, after holding several meetings with them, we've concluded, and we sincerely believe, that the type of sensitive information it does not wish revealed will not be revealed.”

FASB officials privately said they were surprised at the emphasis on the threat posed to consumers, particularly in terms of retail banking. "They seem to be saying that after FASB's rule comes into effect, banks will have to stop using derivatives,” said one puzzled official. She described the argument as a bid "to rile up people on a grassroots level,” and compared it with a FASB ruling on stock options a few years ago that led high-tech companies to "tell their employees that FASB wanted to take their share options away.”

A number of original critics of the proposal have given endorsements of one kind or another. "[The current draft] is a good product,” says Pat Montgomery, vice chairman of the Treasury Management Association, which represents many of the corporations that will have to implement the complex FASB procedures. "We can move on from here based on what they've presented.”

He believes, however, that the changes made from the June 1996 draft, and the one in its final stages of debate, are sufficiently fundamental to justify full re-exposure—or virtually another year of debate—so that any new hidden dangers to business can be identified. Yet even he doesn't believe this option will be taken by FASB. He thinks it's more likely that a compromise is in the offing that will delay the implementation of the proposal at least one year and probably longer, taking effect sometime before financial year 2000.

Jenkins, for his part, is in no mood for more delays, and implied that it will take the brute force of Congress alone to derail FASB's plans. "I think we've waited long enough,” he said. "Congress itself has been asking for this since 1994.” At the end of the day, said Jenkins, "What people have to realize is that if you want to play in this market, you are going to have to live with full and fair disclosure.”