Analysis of Derivatives' Unrealized Gains/losses from Pre-SFAS 133 Disclosures: Banking Industry

By Duangploy, Orapin; Helmi, Dahli | Academy of Accounting and Financial Studies Journal, September 2002 | Go to article overview

Analysis of Derivatives' Unrealized Gains/losses from Pre-SFAS 133 Disclosures: Banking Industry


Duangploy, Orapin, Helmi, Dahli, Academy of Accounting and Financial Studies Journal


ABSTRACT

Accounting for derivative instruments has had tremendous attention in the financial press due to far-reaching and complex problems. The impact of SFAS 133 will not be fully reported in annual reports until well into the year 2002. It is imperative that the potential impacts be anticipated. This article presents the results of an empirical study of the measurement and reporting practices of United States (US)-based banks for their financial derivatives instruments and hedging activities during the year 1998 before the Statement of Financial Accounting Standards (SFAS) Number 133 Accounting for Financial Derivatives Instruments and Hedging Activities became mandatory. The authors analyzed the 1998 annual reports of the largest twenty-five US-based banks. The pre-SFAS 133 measurement and reporting practices were adjusted to anticipate the impact of the SFAS 133 requirements. The impact was imputed and revealed that SFAS 133 has the potential of significantly changing financial results.

INTRODUCTION

Early in the year 2001, Bank of America's stock price declined. The decline was blamed on financial derivatives instruments. The material impact of derivatives on stock prices and other financial reports of banks and other entities substantiated the wisdom of the Financial Accounting Standards Board's (FASB's) requiring the implementation of Statement of Financial Accounting Standards (SFAS) Number 133 Accounting for Financial Derivatives Instruments and Hedging Activities for fiscal years beginning after May 2000. Corporations, such as Bank of America, reporting on an annual basis had to implement SFAS133 on January 1, 2001. Results of this accounting change should appear in annual reports with a year-end of December 31, 2001. These reports are typically published in the second (February) or third (March) month of the following year (2002). The need to anticipate the impact of this accounting change motivated the research that is reported in this article.

This article provides empirical evidence regarding the potential impact of SFAS 133 on the measuring and reporting practices of the largest twenty-five United States (US)-based banks. These banks are subject to SFAS 133 for fiscal years that began June 2000. The research reported in this article examines accounting disclosures under SFAS 107 and SFAS 119, which were superseded by SFAS 133. These actual practices are compiled and analyzed to provide insight on the potential impact that SFAS 133 will have on the banks' reported performance. Relevant past studies are briefly discussed next, followed by the motivation for this study and then a description of the sample and methodology with findings as used in this study. An analysis of unrealized gains and losses are presented next followed by a brief discussion of SFAS 133 as amended by SFAS 138. This is followed by research conclusions and limitations.

PAST STUDIES

Prior studies indicated that the impact of fair-value changes on the derivative financial instruments has not been transparent. Disclosure of derivatives has been diverse. Part of this diversity was due to the Financial Accounting Standards Board (FASB) pronouncements such as SFAS 52 and SFAS 80. They addressed recognition and measurement issues, but provided conflicting guidance. For example, the conceptual conflict where SFAS 52 restricted hedge accounting to the hedging of "firm" commitments of a net investment nature. On the other hand, SFAS 80 allowed hedge accounting for "anticipatory" transactions. SFAS 105, 107, and 119 addressed footnote disclosures in a piecemeal approach.

In 1995, the FASB staff conducted a review of disclosure practices about derivative financial instruments and fair value of financial instruments in the 1994 annual reports of 75 corporations selected from the Fortune 1000 entities. Their findings suggested that (due to inconsistent disclosure practices) users have a difficult time in measuring the magnitude of gains and losses from the changes in fair values of the derivative financial instruments.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Analysis of Derivatives' Unrealized Gains/losses from Pre-SFAS 133 Disclosures: Banking Industry
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.