Academic journal article Journal of Accountancy

FASB Issues ED on Derivatives

Academic journal article Journal of Accountancy

FASB Issues ED on Derivatives

Article excerpt

In response to increasing concerns about derivative financial instruments, the Financial Accounting Standards Board issued an exposure draft of a standard that would require more complete disclosures about such instruments.

Derivatives--instruments whose cash flows are derived from the value of some other asset or index--include forwards, futures, swaps and option contracts. Over the past few years, more than 600 types of such contracts were created. They provide an effective way to manage risk, but only when those who deal with them really understand them. However, derivatives are among the most complex financial instruments, and investors and analysts can misinterpret (or be misled by) derivative disclosures (or the lack thereof) in financial statements.

With several trillion dollars held in derivatives around the world, the FASB decided last December to expand on Statement no. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and Statement no. 107, Disclosures about Fair Value of Financial Instruments. The ED requires derivatives to be categorized as held either for trading or for other purposes, including risk management. …

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