Academic journal article Journal of Accountancy

Official Releases

Academic journal article Journal of Accountancy

Official Releases

Article excerpt

SAS No. 92

SAS No. 92--Auditing Derivative Instruments, Hedging Activities, and Investments in Securities(1) (Supersedes Statement on Auditing Standards No. 81, Auditing Investments (AICPA, Professional Standards, vol. 1, AU sec. 332)

APPLICABILITY

1. This Statement on Auditing Standards (SAS) provides guidance to auditors in planning and performing auditing procedures for assertions about derivative instruments, hedging activities, and investments in securities(2) that are made in an entity's financial statements.(3) Those assertions(4) are classified according to five broad categories that are discussed in SAS No. 31, Evidential Matter (AICPA, Professional Standards, vol. 1, AU sec. 326.03-.08), and address the following:

a. Existence or occurrence

b. Completeness

c. Rights and obligations

d. Valuation or allocation

e. Presentation and disclosure

Derivative Instruments and Hedging Activities Included in the Scope of this SAS

2. The guidance in this SAS applies to derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), of all entities. This SAS uses the definition of derivative that is in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (Statement) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended [AC section D50] (hereinafter referred to as FASB Statement No. 133). FASB Statement No. 133 addresses the accounting for derivatives that are either freestanding or embedded in contracts or agreements. For purposes of applying the guidance in this SAS, a derivative is a financial instrument or other contract with all three of the characteristics listed in FASB Statement No. 133, which are the following.

a. It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not settlement is required.

b. It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

c. Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

3. An entity may enter into a derivative(5) for investment purposes or to designate it as a hedge of exposure to changes in fair value (referred to as a fair value hedge), exposure to variability in cash flows (referred to as a cash flow hedge), or foreign currency exposure. The guidance in this SAS applies to hedging activities in which the entity designates a derivative or a nonderivative financial instrument as a hedge of exposure for which FASB Statement No. 133 permits hedge accounting.

Securities Included in the Scope of this SAS

4. The guidance in this SAS applies to all securities. There are two types of securities--debt securities and equity securities. This SAS uses the definitions of debt security and equity security that are in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities [AC section I80]. This SAS applies to debt and equity securities without regard to whether they are subject to the accounting requirements of FASB Statement No. 115. For example, it applies to assertions about securities accounted for under the equity method following the requirements of Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock [AC section I82]

THE NEED FOR SPECIAL SKILL OR KNOWLEDGE TO PLAN AND PERFORM AUDITING PROCEDURES

5. The auditor may need special skill or knowledge to plan and perform auditing procedures for certain assertions about derivatives and securities. …

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