The continuing restatements and disclosure issues surrounding derivative and hedging activities of U.S. companies are not expected to go away any time soon, says Fitch Ratings.

“Incomplete and inconsistent disclosure of derivative financial instruments by a number of companies, at least partly as a result of the complexity of the rules governing these instruments, continue to raise concern about comparability and uniformity of accounting practices with respect to derivatives,” the firm said.

“While there seems to be no light at the end of the tunnel to make accounting for these instruments less complex than brain surgery, maybe help is on the way through better disclosures that can help investors understand the risk better,” said Raja Akram, senior director of credit policy at Fitch Ratings in New York.

In the current year, giants such as American International Group Inc. and General Electric Co. have admitted to running afoul the accounting rules on derivatives and hedging, Fitch noted. From the analysts’ perspective, Fitch notes that it is difficult to assess whether such restatements signify any underlying problems in the companies’ risk management.

These two companies join hundreds of others within the past year that have restated their financials for misstating results, it notes. Such restatements make financial statements more confusing and complex to investors and analysts alike.

Hundreds of companies in other countries are about to grapple with the issue by bringing hedging derivatives onto the balance sheet for the first time, it adds. This will be one result of the implementation of International Financial Reporting Standards for the 2005 financial statements of quoted in companies in the European Union and elsewhere.

Fitch says it is expecting hedge accounting rules to be applied more “cleanly” by the new IFRS adopters. “Seeing the recent plethora of restatements by their counterparts across the Atlantic should serve to ensure that European companies and their auditors implement hedge accounting more rigorously from the outset,” said Bridget Gandy, managing director in Fitch’s credit policy group in London. “Also, the fair value option provided by IFRS but not yet by US GAAP enables companies to match the accounting treatment of an asset or liability with the way the derivative is accounted for, without having to clear all the hedge accounting hurdles.”

Fitch also notes that the current accounting standards and required disclosures tend to make financial statements less clear, less transparent and less useful to investors. Several of the companies that had to restate for the U.S. accounting standard appeared to have been adjusting financial statements as a result of their belief that accounting was not reflecting economics. Fitch is concerned that simply publishing the GAAP books, following the U.S. standard without an adequate “story” around the numbers is unlikely to enlighten the investors.

“Given the complexity of current accounting rules, Fitch believes that financial statement disclosures should clearly address both the accounting and the economics impacts of derivatives. The best solution at the current time appears to be better and informative disclosures”, said Akram.