Some years before the financial scandal of Enron, which was mainly caused by the misuse
of derivatives, the Financial Accounting Standard Board (FASB) began deliberating
on issues related to derivatives and hedging transactions.1 The cause of thinking about
changes in accounting for derivatives was a problematic situation in 1986 (comparable
to current situation in Germany). For example, the applicatory use was very complicated
and transactions with derivatives were not transparent enough. There were only clear
standards for a few product groups and transactions with derivatives were not reported
on the balance sheet.2
In consequence, first in 1986, a work program called Project on Financial Instruments
was founded.3 In 1992 the members of the FASB received the responsibility in working
on derivatives and continued improving the existing statement for about six years in
more than 100 meetings. In June 1998 (06/16/1998) the Statement for Financial Accounting
Standard (SFAS) No. 133 “Accounting for Derivative Instruments and Hedging
Instruments” passed as an outcome of these efforts and is valid for every entity.4
Some public voices say, it is one of the most complex and controversial standards ever
issued by the FASB.5
Statement No. 133 replaced FASB Statement No. 80 (Accounting for Future Contracts),
No. 105 (Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk) and No. 119 (Disclosures
about Derivative Financial Instruments and Fair Value of Financial Instruments).
6 Also FASB Statement No. 52 (Foreign Currency Translation) and No. 107
(Disclosures about Fair Value of Financial Instruments) were amended, by including the
“disclosure provisions about concentration of credit risk” form Statement No. 105 in
Statement No.107.
Despite the fact that the new Statement was issued in June 1998 it only was effective on
financial statements for fiscal years beginning after June 15, 2000. [...]
1 Cp. Ernst & Young LLP (2002), p. 1.
2 Cp. Henne, T.(2000), p. 51.
3 Cp. Zander, D. (2000), p. 985.
4 Cp. Maulshagen ,A./Maulshagen, O. (1998), p. 2151.
5 Cp. International Treasurer (1999).
6 Cp. Ernst & Young LLP (2002), p. 1.
Table of Contents
- Overview
- Different kinds of derivatives
- Classic financial instruments
- Derivatives in the meaning of SFAS No. 133
- Criteria for special accounting
- Basic methods of hedge accounting
- Fair value hedge accounting
- Cash flow hedge accounting
- Foreign currency hedge accounting
- Current topics on accounting for derivatives
- Conclusions
Objectives and Key Themes
This paper aims to provide an overview of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Instruments," focusing on its complexity and implications for accounting for derivatives under US Generally Accepted Accounting Principles (US-GAAP). It will explore the different types of derivatives, the criteria for special accounting treatment, and the basic methods of hedge accounting as defined by SFAS No. 133.
- The evolution and development of accounting standards for derivatives.
- The definition and classification of various derivative instruments.
- The criteria for qualifying derivatives as hedge items under SFAS No. 133.
- The different methods of hedge accounting (fair value, cash flow, and foreign currency).
- The complexities and controversies surrounding SFAS No. 133.
Chapter Summaries
Overview: This chapter provides a historical context for SFAS No. 133, highlighting the problematic situation in accounting for derivatives before its introduction. It explains the development of SFAS No. 133, including the establishment of the Project on Financial Instruments and the role of the Derivatives Implementation Group (DIG). The chapter emphasizes the complexity and controversy surrounding this standard and its impact on US-GAAP, noting its delayed effective date to allow for implementation. The introduction of SFAS No. 133 was driven by the need for greater transparency and standardization in accounting for derivatives, following the recognition of significant issues with existing practices.
Different kinds of derivatives: This section would delve into the diverse types of derivatives, categorizing them and exploring their unique characteristics and uses within financial markets. The distinction between classic financial instruments and those specifically defined as derivatives under SFAS No. 133 would be a central focus, analyzing the criteria used for classification. This section's significance lies in providing a foundational understanding of the instruments governed by SFAS No. 133. Examples of derivative instruments would likely be included, along with their associated risks and potential benefits.
Criteria for special accounting: This chapter focuses on the specific criteria outlined in SFAS No. 133 that determine whether a derivative instrument qualifies for special accounting treatment as a hedge. It examines the conditions that need to be met for fair value and cash flow hedge accounting, highlighting the rigorous requirements designed to prevent manipulation and ensure accuracy in financial reporting. This is crucial for understanding how SFAS No. 133 aimed to enhance the reliability and transparency of financial statements by carefully defining criteria for hedge accounting.
Basic methods of hedge accounting: This section explains the three main methods of hedge accounting under SFAS No. 133: fair value hedging, cash flow hedging, and foreign currency hedging. Each method is analyzed separately, detailing the specific requirements, procedures, and accounting treatments involved. Crucially, it examines the differences between these methods and their implications for financial reporting, explaining how each approach addresses different types of risk associated with derivative instruments and thereby affects financial statement presentation. The comparison of fair value versus cash flow hedging, for instance, would be key.
Keywords
SFAS No. 133, derivative instruments, hedge accounting, fair value hedge, cash flow hedge, foreign currency hedge, financial accounting standards, US GAAP, accounting for derivatives, hedging transactions, financial instruments.
FAQ: Accounting for Derivative Instruments and Hedging Instruments under SFAS No. 133
What is the purpose of this document?
This document provides a comprehensive overview of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Instruments," explaining its complexities and implications for accounting under US Generally Accepted Accounting Principles (US GAAP). It covers different derivative types, criteria for special accounting treatment, and basic hedge accounting methods as defined by SFAS No. 133.
What topics are covered in the Table of Contents?
The document includes sections on an overview of SFAS No. 133, different kinds of derivatives (including classic financial instruments and those defined under SFAS No. 133), criteria for special accounting, basic hedge accounting methods (fair value, cash flow, and foreign currency hedges), current topics on derivative accounting, and conclusions.
What are the key objectives and themes explored?
The key objectives are to understand the evolution of derivative accounting standards, define and classify derivative instruments, identify criteria for qualifying derivatives as hedges under SFAS No. 133, explain different hedge accounting methods, and analyze the complexities and controversies surrounding SFAS No. 133.
What is the historical context provided in the "Overview" chapter?
The overview explains the problematic situation in derivative accounting before SFAS No. 133, detailing the standard's development, including the Project on Financial Instruments and the Derivatives Implementation Group (DIG). It emphasizes the complexity and controversy surrounding the standard and its delayed effective date.
How are different kinds of derivatives categorized?
The document categorizes derivatives, exploring their unique characteristics and uses. A key focus is the distinction between classic financial instruments and those specifically defined as derivatives under SFAS No. 133, analyzing the classification criteria and providing examples.
What are the criteria for special accounting treatment (hedge accounting)?
This section details the specific criteria in SFAS No. 133 that determine if a derivative qualifies for special accounting as a hedge. It examines the conditions for fair value and cash flow hedge accounting, emphasizing the rigorous requirements designed to prevent manipulation and ensure accurate financial reporting.
What are the basic methods of hedge accounting under SFAS No. 133?
The three main methods—fair value hedging, cash flow hedging, and foreign currency hedging—are explained, detailing requirements, procedures, and accounting treatments. The differences between methods and their implications for financial reporting are analyzed, showing how each approach addresses different types of risk.
What are the key keywords associated with this document?
Key words include: SFAS No. 133, derivative instruments, hedge accounting, fair value hedge, cash flow hedge, foreign currency hedge, financial accounting standards, US GAAP, accounting for derivatives, hedging transactions, and financial instruments.
What are the chapter summaries about?
Each chapter summary provides a concise overview of its corresponding chapter, highlighting key concepts and findings. The summaries offer a quick understanding of the information presented in each section of the document.
- Citation du texte
- Jörg Decker (Auteur), 2003, Accounting for Derivatives (US-GAAP), Munich, GRIN Verlag, https://www.grin.com/document/15575
