Short answer: IAS 39 will lead to increased earnings volitilty and
greater flucuations in balance sheet values.
IAS 39 isn't a proposal to change the layout/formatting/content of
financial statements, so a better way to phrase the question is "What
effect will IAS 39 have on companies' report results?"
Briefly, IAS 39 would require companies to record derivative
instruments on their balance sheets at market value. Currently, such
instruments are carried at historical (i.e., purchase) cost. Since the
purchase price (premium) for derivatives is often miniscule compared
to the implicit asset/liability tied to the derivative, some argue
that carrying the instruments only at historical cost is misleading.
IAS 39 proposes to change this by requiring companies to carry the
derivatives on their balance sheet at market value. In order to
maintain financial statement linkages, period-to-period adjustments to
the fair market value will have to pass through income statment
accounts as gains/losses. These will be treated similar to
gains/losses on securities held for sale.
Since derivatives can swing widely in short periods, these
gains/losses on the income statments have the potential to
overshadow/obscure companies' "core" earnings behavior. However,
sophisticated investors will be able to understand and account for IAS
39 flucuations in earnings. |
