Academic journal article Journal of Accountancy

FASB Considers Measuring Derivatives at Fair Value

Academic journal article Journal of Accountancy

FASB Considers Measuring Derivatives at Fair Value

Article excerpt

The Financial Accounting Standards Board is pursuing a new approach to account for derivatives and hedge activities: All derivatives would be carried on the balance sheet as assets or liabilities and measured at fair value.

This approach, proposed at the FASB January meeting and modified since, failed to win approval at the board's March 5 meeting, and an alternative model is being considered. However, the board's goal is to issue an exposure draft of its proposed standard for public comment by June 30, according to project manager Robert C. Wilkins.

Accounting for gains and losses on the financial instruments would depend on the reason they are being held. For example, gains and losses on derivatives that are designated as hedges of assets and liabilities would be included in earnings, and the offsetting losses and gains on the hedged item would be accelerated and recognized in earnings in the same period. For derivative instruments designated as hedges of forecasted transactions, gains and losses would be reported in equity (as a component of comprehensive income), then recognized in earnings when the forecasted transaction occurred. For all other derivatives, including both those not designated as hedges and those designated as hedges of other derivatives, gains and losses would be recognized as earnings.

The proposed standard will cover recognition and measurement of derivatives; hedges of existing assets, liabilities and firm commitments; hedges of forecasted transactions; instruments to be included in the scope of the proposed standard; foreign currency issues related to hedging; disclosures; and presentation. …

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