The body that writes accounting rules in the US has approved measures that will require companies to disclose more information to investors about the potential liabilities attached to standby letters of credit (L/Cs) they issue.

The Financial Accounting Standards Board (FSAB) approved the new rules on 25 November 2002. Companies will soon be required to recognise a standby L/C's liability at market value and disclose that information openly on quarterly and annual financial statements.

Under pressure

The new disclosure rules, which apply to loans guaranteed by companies as well as standby L/Cs issued to guarantee a venture, are a result of pressure on company accountants to provide investors more information on their off-balance-sheet activities.

These pressures are a result of Enron's use of off-the-books partnerships known as special-purpose entities in which the energy giant was effectively able to hide liabilities and inflate profits.

Transparency

Until now, companies that issue standby L/Cs or guaranteed loans have only been required to establish a balance sheet liability for them if they face "probable and measurable" losses. The new rule requires a liability for the L/C or guarantee to be clearly identified when it is issued.

The new rules apply to new standby L/Cs and guarantees issued or modified after 31 December 2002. These liabilities must be disclosed in quarterly or annual periods ending after 15 December 2002.

The FSAB is planning to introduce measures requiring companies to include on their own balance sheets assets and liabilities of many special-purpose entities by the end of the year.

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