FASB issues staff position about credit derivatives

FASB has issued a staff position (FSP) intended to improve disclosures about credit derivatives. The staff position would require more information about the potential adverse effects of changes in credit risk on the financial position, financial performance, and cash flows of the sellers of credit derivatives.

The staff position, FSP No. 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161, amends FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments.

Credit default swaps have become at dominant product of the credit derivatives market. They also have become the focus of attention for both market participants and regulators because of the turmoil in credit markets during 2007 and 2008. During this period, some sellers of credit derivatives have seen a large number of obligations that are referenced in credit default swaps facing actual or potential defaults, resulting in large liabilities and/or potential credit downgrades.

The FSP will also:

• Address the potential adverse effects of changes in credit risk on the financial statements of the sellers of credit derivatives
• Amend FASB Interpretation No. 45 to require an additional disclosure about the current status of the payment/performance risk of a guarantee
• Clarify FASB’s intent about the effective date of FASB Statement No. 161
  
  

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