Mr. Timothy Lucas
Director of Research and Technical Activities
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116

Re: Draft Standard - Accounting for Derivative and Similar Financial Instruments and Hedging Activities

Dear Mr. Lucas:

The Treasury Management Association (TMA) welcomes the opportunity to submit comments on the August 29, 1997 release of the standards section of the Exposure Draft on Accounting for Derivatives and Similar Financial Instruments and Hedging Activities.

The TMA represents over 11,000 treasury professionals who, on behalf of over 4,000 corporations and other organizations, are significant participants in the nation's payments system and capital markets.  Many of our members are responsible for their organizations' derivatives activities with the primary objective of risk management.  Organizations represented by our members are drawn generally from the Fortune 1000 and the largest of the middle market companies, and they have an active interest and sizable stake in any accounting standards, regulatory and legislative changes affecting financial reporting of derivatives and other transactions.

TMA recognizes that the Board has labored industriously to respond to the many concerns with the Exposure Draft expressed during the original comment period.  While the current draft retains the basic framework of the Exposure Draft, many key provisions have been modified in response to constituent comments during the nearly continuous FASB deliberations between January and July of this year.  TMA acknowledges that several of our concerns stated in October 1996 have been addressed and appropriate modifications have been incorporated into the current version of the standard.  These modifications include:

• Users of hedges have greater flexibility in designing strategies and assessing hedge effectiveness.  Effective dynamic and rollover strategies are permitted.
   
• More assets or liabilities can be aggregated and hedged as an asset or liability portfolio.
   
• Limited opportunities now exist for using written options and basis swaps as hedges.
   
• The new definitions of a derivative -- and especially the new definition of an embedded derivative -- will include more instruments and embedded instruments.
   
• The opportunity to hedge intercompany foreign exchange transactions has been expanded.

We appreciate the efforts of FASB and its staff in being responsive to some earlier concerns.  However, we also recognize that relatively few of the organizations which employ our members have focused on the changes in the evolving draft.  The impact of these changes are little understood and await considerable analysis.

The process used by FASB to analyze comments on the original Exposure Draft and consider changes to the proposal was certainly "open," but daunting for observers.  The proposal became a constantly changing work-in-process for a seven-month period, while the Board met almost weekly to vote on acceptance of "tentative" changes.  Attendance at the meetings required costly and time consuming travel.  Meetings were difficult to follow because working papers used by the Board were not available to observers.  Understandably, few representatives of corporate end-user organizations attended these meetings so the evolution of the original Exposure Draft to the current version released for comment remained a mysterious moving target.

Certainly, the 45-day comment period, expiring on October 14, has not provided enough time to determine the impact of the proposed rules on existing practices.

The TMA believes that meaningful, cost-justified accounting standards are essential to the efficient functioning of the economy.  We recognize the vital role of FASB in this process, and support the current overall structure of our accounting standard process.  However, we are concerned that the proposed standard may cause widespread confusion, impose complex implementation problems, increase financing costs, create expensive reporting requirements, and discourage prudent financial risk management techniques.

In particular, we are concerned that:

• The revised Exposure Draft has been challenged by end-users of derivatives, many of our nation's leading financial institutions, and prominent financial and accounting organizations.
   
• The perceived benefits associated with the proposed standard will not exceed the costs of compliance.
   
• Earnings and equity volatility may be created by the proposed standard, not only for banks, but also for corporate users of legitimate yet imperfect hedging strategies.
   
• There has been no analysis of the potentially dramatic economic consequences flowing from the proposal.
   
• There has been inadequate field testing of the proposed standard.

We believe that:

• Market forces, regulatory requirements and accounting standards already in place have moved business enterprises toward more consistent practices of accounting and reporting of derivatives activities.
   
• Accounting standards for derivatives should initially focus on trading activities and should not be overly burdensome for risk management techniques.  Some valid hedging strategies which do not yield perfect offsets between the derivative and hedged item may be interpreted as speculative activities.
   
• The proposal may discourage the use of effective risk management techniques which have evolved over many years, and have proved vital to the global competitive standing of corporate America.
   
• The proposal is complex and difficult to understand.
   
• Insufficient time has elapsed for proper analysis of the favorable impact on corporate disclosures of FAS 119 and other steadily improving practices.
   
• The proposed standard is a risky interim solution which should be deferred until it can be considered within the context of fair value treatment of financial instruments.

Most of our members who have analyzed the revised Exposure Draft support an approach which would have the Board codify current practice as an interim step and address the proposed standard as part of an overall approach toward fair value accounting for all financial instruments.

We recommend that FASB carefully consider the urgent concerns of the financial community and corporate America with the current draft.  It is critical that FASB does not hastily complete its deliberations to meet an arbitrary December 1997 deadline to complete the standard.  The proposal is a complicated combination of marking some financial items to market and not others, of having the result of some accounting adjustments affect reported earnings, and others carried as direct entries to the capital account, and having some value changes not appear at all.

The majority of financial industry managers of balance sheets, as well as federal financial institution regulators have been highly critical of the proposal.  It is fair to say that consensus has not been reached on a generally accepted accounting principle.  It appears that there is much to gain for all concerned in assuring that the most thorough, rational and informed analysis, including comprehensive field testing, occur before forcing the implementation of highly complex, and costly accounting rules.  With the environment of vocal criticism from those who would benefit from an effective standard, it seems prudent to move cautiously and not rush to cut off discussions.

It is puzzling to our membership why the Board is pursuing a December 1997 release of the final standard amidst the fury of criticism from major segments of the financial community, calls for delay from accounting professional organizations, and a general lack of understanding by constituents about the standard.

Accordingly, TMA urges FASB to release a new Exposure Draft for full pubic comment. The subsequent round of public debate would relieve the current confusion and criticism, and afford the opportunity to create appropriate consensus on the standard.

However, should FASB pursue the current schedule of finalizing the draft in December of this year, the implementation schedule for a 1999 fiscal year effective date certainly needs to be delayed.  Our members report that many organizations are experiencing critical shortages of systems and management resources to cope with the year 2000 problem, Europe's conversion to the EMU and the new derivatives disclosure requirements established by the Securities and Exchange Commission (SEC) which will be phased in beginning mid-1998 for the 500 highest capitalized organizations.  Implementation within the planned time frame will not be possible for some, and certainly costly and difficult for others.  Reportedly, the Standards Executive Committee of the American Institute of Certified Public Accountants (AICPA) has recommended a 12-month delay in the planned effective date.  At least a one-year extension of the planned effective date is needed for required system changes associated with the standard, and to understand the implications of the new accounting standard.

We appreciate the opportunity to offer these comments.

/s/ Arthur R. Cunningham, CCM, CPA
Pioneer Hi-Bred International, Inc. and
Chair, Government Relations Committee,
Treasury Management Association

/s/ Patrick M. Montgomery, CCM, CPA
ULLICO and
Vice-Chairman of the Board of Directors,
Treasury Management Association

/s/ Frank P. Curran
Vice President, Government Relations and Technical Services
Treasury Management Association