In the second of four short-term measures intended to help unclog credit markets, the Financial Accounting Standards Board has published its proposal to revise accounting rules related to embedded credit derivatives.

The guidance would amend the requirements of Financial Accounting Standard No. 133: Accounting for Derivative Instruments and Hedging Activities to clarify when certain credit derivative features are subject to mark-to-market accounting, or fair-value measurement, independent of the derivative instrument to which they are linked.

FASB has also finalized its planned guidance on impairment, amending a proclamation of the Emerging Issues Task Force to point preparers toward the impairment guidance and disclosure requirements contained in FAS 115: Accounting for Certain Investments in Debt and Equity Securities.

The derivative question arose as FASB and the International Accounting Standards Board sorted through U.S. and international accounting rules to determine where there are issues that could be affecting accounting in the current credit market stalemate. Entities reporting under international rules lobbied FASB to reconsider the U.S. requirements with regard to embedded credit features to make them more comparable to international standards, said Hee Lee, a partner focused on derivatives for Ernst & Young.

According to Lee, existing U.S. derivative accounting rules provide different criteria for operating companies compared with special-purpose entities when determining whether embedded items should be accounted for separately at fair value, with changes in value reflected in earnings. FASB said the objective of the proposed guidance is to resolve “potential ambiguity” about a scope exception in FAS 133 that gave preparers a pass on accounting for embedded credit features separately at fair value.

Practitioners were expecting FASB to issue more stringent requirements to call for more fair value and make them more comparable with international rules, said Lee. The structures that the guidance is intended to address are not common, so he’s not sure how the guidance will impact market problems, he said. “We’re all kind of puzzled with the proposal because it’s consistent with what the industry is doing,” he said. “We’re supportive. We’re not sure what this will achieve in terms of the original objectives.”