GROUP MOVES
Accounting for derivatives
(ontrolling transition
The International Accounting Standards IASguideline for the
recognition and measurement of financial instruments, IAS39, is
causing something of a furore in the banking world. The chief financial
officer of a major bank in the Netherlands, quoted in a Dutch newspa-
per last year, stated that the impact of this guideline for derivatives
could result in the disappearance of the fixed-rate mortgage. Rabobank
disagrees and is confident they ivill find solutions to minimize the
impact. A derivative is a financial instrument, such as an option or
swap, which can be used to bedge against market volatility. The fact
that the treatment of derivatives changes dramatically under IAS is the
big issue. Many accounting scandals have been derivative-related,
going right back to the Barings scandal in the early 1990s. In general,
people are scared off by their complexity, but derivatives are used very
effectively to bedge Rabobank 's portfolios. Regulators have been
working towards a common approach for many years, resulting in
this new guideline.
The key term in the new treatment of derivatives is 'fair value'. The
International Accounting Standards Board (IASB) defines fair value as,
'an amount for which an asset could be exchanged, or a liability
settled, between knowledgeable and willing parties in an arm's length
transaction'. Says Steve Huyton, Business Controller, 'Fair value or
Mark to Market accounting has been the norm for trading books for
many years. We 're now extending its usage to derivatives in otber
books, moving from the current practice of accrual accounting - where
you have an interest flow over a period of time, which you recognize
evenly - to having to calculate the "fair value" of that derivative. This
involves looking at future cash flows and saying what those cash flows
are worth in current terms. Therefore, a small change in interest rates
or any other financial market indicator can mean a big change in the
current value of that derivative. Suddenly, that means for a bank, or
any company, a lot more volatility in your earnings, whereas before, we
saw a nice, steady stream of income.
Taking control of this volatility is essential and Rabobank has made a
significant step in that direction. Rabobank will create a new central
department that will focus its efforts on 'targeted hedge accounting'.
Says Huyton, With the new accounting rule, one way in which you
can temper volatility is "hedge accounting"which allows you to link a
particular derivative with the hedged asset, removing most of the
volatility.But, proving this link can be difficult when you consider
that a fixed-rate mortgage granted by a member bank may ultimately
be hedged as part of a multi-million euro contract in the wholesale
market. Says Huyton, 'Rabobank's creation of a new department to
deal with this highly complex issue will make the transition to IAS
smoother for all other departments.'
tation. The remaining 12 RI offices will
follow the same training in September
and October. After training, the offices
will independently start restating 2003
figures in IAS terms.
'Doublé head office financial reporting
is required for the coming quarters,' Bos
advises. 'This obviously puts a lot of
pressure on those involved. Thankfully,
RI's controllers are accustomed to
complex reporting. With the necessary
training, we are confident of a smooth
transition.' More information about the
IAS implementation project can be
found on intranet:
controIri.rabobank.com and in the IAS
newsletter available through this site.
Steve Huyton - calculating 'fair value'
30 1 RI The Word I
