But some volatility is likely to remain, since it is the lack of close correlation that prevents hedge accounting treatment. The IASB developed the new “fair value option” under International Accounting Standard (IAS) 39, under which firms could mark to market both the credit derivative and the hedged position and report changes in their fair values in current earnings.
While at first glance the fair value option might be viewed as the solution to addressing the problems of the current accounting model, it also raises a number of concerns. Without observable market prices and sound valuation approaches, fair value measurements are difficult to determine, verify, and audit. Reporting would become less comparable across institutions.