Introduction to FASFASand IAS 39 Accounting for Derivative Financial Instruments and Hedging Activities. This document was prepared for my General Electric Train the Trainer Workshops on June 21 and 29, Bob Jensen at Trinity University. My free online cases are at http: Introduction Hedge Accounting Fair Value Hedges Cash Flow Hedges Foreign Currency Hedges Assessing Hedge Effectiveness Discontinuance of Hedge Accounting Disclosures Effective Date and Transition Common Risk Management Strategies Under FAS A Condensed Outline Overview With Audio from Experts.

Bob Jensen's Online FAS and IAS 39 Glossary. It may be best to take a look at a flowchart just to know that it is always there and can be viewed at any time. The link is at http: Or the relative link isflow. Inthe Financial Accounting Standards Board FASB issued Financial Accounting Standard FAS on Accounting for Derivative Financial Instruments and Hedging Activities. This was followed in by International Accounting Standard 39 IAS 39 from the International Accounting Standards Committee IASC.

Although less detailed and complex than FASIAS 39 accounting rules are virtually in accordance with FAS Differences are noted in green in Bob Jensen's Glossary at http: Paul Pacter itemized the major differences at http: Click here for a history summary with video and audio.

It is not tentative in terms of required implementation, but it may fade in prominence if and when the FASB issues its proposed fair value standard for all financial instruments.

The first exposure draft on this even more controversial proposal is given in Exposure Draft B entitled Reporting Financial Instruments and Certain Related Assets and Liabilities at Fair Value at http: The DIG In the meantime, the FASB formed the FAS Derivatives Implementation Group DIG to help resolve particular implementation questions, especially in areas where the standard is not clear or allegedly onerous.

The FASB's DIG website that contains its mission and pronouncements is at http: DIG issues are also sumwarized in red borders at http: Click Here for Audio Commentaries on the DIG http: FAS Amendments to FAS The more important issues that surfaced in the DIG have resulted in a new standard FASAccounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No.

The FASB provides some new examples illustrating the FAS Amendments to FAS at http: I have created a summary document called " FAS As Amended and DIGed: The FASB staff has prepared a new publication titled, Accounting for Derivative Instruments and Hedging Activities.

This essential aid to implementation presents Statement as amended by Statements and Also, it includes the results of the Derivatives Implementation Group DIGas cleared by the FASB through September 25,with cross-references between the issues and the paragraphs of the Statement.

FASB's FAS Amendments to FAS FASAccounting for Certain Derivative Instruments and Certain Hedging Activities an amendment of FASB Statement No. One of the best documents the FASB generated for FAS implementation is called "summary of Derivative Types. It can be downloaded free from at http: For a FAS flow chart, go to http: This document can be downloaded from http: If an item is viewed as a financial instrument rather than inventory, the accounting becomes more complicated under SFAS Traders in financial instruments adjust such instruments to fair value with all changes in value passing through current earnings.

Business firms who are not deemed to be traders must designate the instrument as either available-for-sale AFS or hold-to-maturity HTM. A HTM instrument is maintained at original cost. An AFS financial instrument must be marked-to-market, but the changes in value pass through OCI rather than current earnings until the instrument is actually sold or otherwise expires.

Under international standards, the IASC requires fair value adjustments for most financial instruments. This has led to strong reaction from businesses around the world, especially banks. There are now two major working group debates.

In the Joint Working Group of the Banking Associations sharply rebuffed the IAS 39 fair value accounting in two white papers that can be downloaded from http: Issues Relating to Banks strongly argues for required fair value adjustments of financial instruments.

The issue date is August 31, Trinity University students may view this paper at J: Others may go to the IASC download site at http: Accounting for financial Instruments for Banks concludes that a modified form of historical cost is optimal for bank accounting. The issue date is October 4, Trinity University students may view this paper at J: Recommended Tutorials on Derivative Financial Instruments but not about FAS or IAS You might start at http: Then you can try Financial Derivatives in Plain English http: Recommended Tutorials on FAS You can also download Excel worksheet tutorials on the first 10 examples in files ex01a.

Teets and Robert Uhl available free from http: The book in hard copy or PDF versions can be ordered at http: PwC Book that I cannot find an online reference to is the PricewaterhouseCoopers book entitled A Guide for Derivative Instruments and Hedging Activities. PwC also has a book entitled FAS New Rules for Derivatives by Robert Sullivan and Lou Le Guyader. Another PwC book is entitled Derivatives and the Internal Auditor. You can order all PwC books and other risk publications at http: Bob Jensen's FAS Glossary on Derivative Financial Instruments and Hedging Activities.

Faculty and practitioners may find these useful http: The FASB's FAS and IASC's IAS 39 were badly needed standards in spite of strong opposition from the corporate world, especially from the banking community. Many types of contracts included in the scope of these standards e. Settlement accounting failed to disclose or measure assets, liabilities, and risks of these contracts. Some contracts had prior standards e.

Some corporations had enormous financial risks in derivative instruments that were not disclosed. Initially the FASB and the IASC wanted very simple apart from difficulties in measuring fair value accounting standards that required all derivative instruments to be maintained at fair value with gains and losses due to changes in value being posted to current earnings. Due to immense political pressures that came down largely from financial institutions and their friends in governmentspecial exceptions were granted for certain types of contracts.

As a result, the hoped-for simple fair value accounting standards turned into the most complex nightmares ever issued by either the FASB or the IASC. Read about and listen to the experts complaining in http: A FAS and IAS 39 Glossary is available at http: Complaints about both standards may be overshadowed by complaints about more recent movements by the FASB and the IASC to require fair value accounting for all financial instruments rather than just derivative instruments.

You can read about this and find links to the current exposure drafts for new standards requiring such fair value accounting. Look up "Fair Value" at http: If those new fair value standards are enacted, both FAS and IAS 39 fade in importance.

Until then, however, implementation of FAS and IAS 39 has become the most difficult and costly implementation of any accounting standards in history.

There are many complex and controversial issues with discovery of embedded derivatives, value estimation, and effectiveness testing of hedges being the most problematic issues. Note especially that Appendix A beginning in Paragraph 57 of FAS provides implementation guidance. Section 2 of Appendix A beginning with Paragraph 62 deals with assessment of hedge effectiveness.

A contract that requires ownership or delivery of the underlying is a derivative financial instrument if a the underlying is another derivative, b a mechanism exists in the market such as an organized exchange to enter into a closing contract with only a net cash settlement, or c the contract is customarily settled with only a net cash payment based on changes in the price of the underlying. What is most noteworthy about derivative financial instruments is that in the past two decades, the global use of derivatives has exploded exponentially to where the trading in notional amounts is in trillions of dollars.

Unlike FASIAS 39 makes explicit reference also to an insurance index or catastrophe loss index and a climatic or geological condition. I did not, however, see anything on accounting for derivatives under FAS or IAS A nonderivative financial instrument fails one or more of the above tests to qualify as a derivative in FAS Nonderivatives do not necessarily have to be adjusted to fair value like derivative instruments.

However, they may be used for economic hedges even though they do not qualify for special hedge accounting under FAS See FAS Paragraphs 6c, 17d, 18d, 20c, 28d, 37, 39, 40, 42, 44, 45,,and Also see foreign currency hedge. It is important to note that all derivatives in finance may not fall under the FAS definition. In FASa derivative must have a notional, an underlyingand net settlement. There are other requirements such as a zero or minimal initial investment as specified in Paragraph 6b and Appendix A Paragraph 57b of FAS and Paragraph 10b of IAS Examples of derivatives that are explicitly excluded are discussed in Paragraph on Page of FAS Paragraph 10c of IAS 39 also addresses net settlement.

IASC does not require a net settlement provision in the definition of a derivative. To meet the criteria for being a derivative under FASthere must be a net settlement provision. Also see IAS 39 IAS Key to this definition are the concepts of "underlying," "notional amount," and "payment provision. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.

Accordingly, the underlying generally will be the referenced index that determines whether or not the derivative has a positive or negative value. A "notional amount" is a number of currency units, shares, bushels, pounds, or other units specified in the contract. The notional amount represents the second half of the equation that goes into determining the settlement amount or amounts under the derivative contract.

Accordingly, the settlement of a derivative is determined by the interaction of the notional amount with the underlying. This interaction may consist of simple multiplication or it may involve a more complex formula. A "payment provision" specifies a fixed or determinable settlement that is to be made if the underlying behaves in a specified manner e. Most futures, forwards, swaps, and options will meet the FAS definition of a derivative.

As a general matter, one's intuition of what is or is not a derivative will probably align with the Standard most of the time. Regarding intuition, however, it would be prudent to follow the motto: Like most man-made things, the FAS definition is not perfect. It includes some things that the FASB wanted to exclude and excludes some things that the FASB wanted to include.

So there are some exclusions and add-ons to the Standard. Among the more important exclusions are. The exclusion of "normal" purchases and sales of inventory items may have the most relevance for some companies. Simply stated, if a forward contract for the purchase or sale of inventory or other goods that are not financial instruments cannot be settled net and represents a purchase or sale that occurs in the entity's normal course of business, it is not accounted for under FASeven though technically it might meet the definition of a derivative.

Various exceptions are dealt with in Paragraph 58 of FAS For example, Paragraph 58c reads as follows:. Certain contracts that are not traded on an exchange.

A contract that is not traded on an exchange is not subject to the requirements of this Statement if the underlying is: Climatic, geological, and other physical variables include things like the number of inches of rainfall or snow in a particular area and the severity of an earthquake as measured by the Richter scale. That exception is intended to apply to contracts with settlements based on the volume of items sold or services rendered, for example, royalty agreements.

It is not intended to apply to contracts based on changes in sales or revenues due to changes in market prices. If a contract's underlying is the combination of two or more variables, and one or more would not qualify for one of the exceptions above, the application of this Statement to that contract depends on the predominant characteristics of the combined variable.

The contract is subject to the requirements of this Statement if the changes in its combined underlying are highly correlated with changes in one of the component variables that would not qualify for an exception.

One of the things that concerns accounting standard-setters when they are considering a new standard is the possibility that people might find a way around the rules. In the case of derivatives, the FASB realized that it may not be all that difficult for financial engineers to "embed" derivatives into contracts that clearly are not derivatives. In so doing, these so-called "embedded derivatives" could escape the new accounting rules that are intended for them. This concern led to the inclusion of certain "embedded derivatives" in the Standard's scope.

Click Here for Audio Clips About the Definition of a Derivative Instrument http: Embedded derivatives are portions of contracts that meet the definition of a derivative when the entire nonderivative contract cannot be considered a financial instruments derivative. Embedded derivatives are discussed in FASpp. Embedded derivatives such as commodity indexed and equity indexed contracts and convertible debt require separation of the derivative from the host contract in FAS accounting.

In contrast, credit indexed and inflation indexed embedded derivatives are not separable from the host contract. Also see FAS Paragraphs 51, 60, 61,and The overall contract is sometimes referred to as a "hybrid" that contains one or more embedded derivatives.

Embedded derivatives within embedded derivatives generally meet the closely-and-clearly related test and cannot be accounted for as separate derivatives. Rules for accounting for the host contract after an embedded derivative has be bifurcated are discussed in FAS Paragraph If an embedded derivative should bifurcated but the firm cannot do so for some reason, FAS Paragraph 16 requires that the entire contract be treated as a trading security that is adjusted to fair value at least quarterly with changes and fair value being charged to current earnings rather than OCI.

See FAS Paragraph 16 and IAS 39 Paragraph Paragraph 10 notes that interest only strips and principal only strips are not subject to FAS accounting rules under conditions noted in Paragraph In Paragraph 15, it is noted that embedded foreign currency derivatives "shall not be separated from the host contract and considered a derivative instrument. An example is a leveraged gold note that has the amount of note's principal vary with the price of gold.

This type of note can be viewed as containing a series of embedded commodity gold option contracts. These options can separated out and accounted for as derivatives apart from the host contract under Paragraph 12 on Page 7 of FAS under the assumption that the price of gold is not " clearly-and-closely related " to interest rates. An equity-linked bear note is another example of a note with a series of embedded options that can be accounted for as separate derivative instruments under Paragraph 12 of FAS The embedded condition that interest rates may move up based upon an index can qualify as an embedded derivative that can be separated according to Paragraph 12 on Page 7 of FAS provided the derivative is not clearly-and-closely related.

In this example, the bonds are not derivatives, and the embedded derivatives can be separated from the host contract under FAS rules. Derivatives cannot be embedded in other derivatives according to Paragraph 12c on the top of Page 8 of FAS For example, an index-amortizing interest rate swap cannot usually be accounted for as a derivative instrument pursuant to FAS under Paragraph 12 on Page 7 of FAS when it is a derivative embedded in another derivative.

KPMG states that Paragraph 12 applies only "when a derivative is embedded in a nonderivative instrument and illustrates this with an index-amortizing Example 29 beginning on Page 75 of the Derivatives and Hedging Handbook issued by KPMG Peat Marwick LLP in July The prior Example 28 and the subsequent Example 30 illustrate index-amortizing embedded derivatives that qualifies since, in each example, the derivative is embedded in a nonderivative instrument.

One of the major sources of difference between FAS and IAS 39 concerns embedded derivatives. These are less important in IAS 39 accounting that adjusts all financial instruments to fair value whether or not derivatives are embedded.

IAS 39 differs in that it requires fair value adjustments of "all" financial instruments rather than just derivatives see IAS Paragraphs 1, 5, and 6. In summary, bifurcation under FAS is required in the following examples: See FAS Paragraph 61d. An example is given in FAS Paragraph Also see IAS 39 Paragraph 24g.

A call option embedded in the related equity instrument would not be separated from the host contract by the issuer, but would be otherwise for the holder of the related equity instrument. Equity-indexed interest payments See FAS Paragraph 61h and an example given in SFAS Paragraph Also see IAS Paragraph 24d. Option to Extend Debt Maturity Variable annuity instruments are generally not subject to FAS accounting rules except for specific components such as equity-index-based interest annuity and accumulation period payments discussed in Paragraph Also see IAS Paragraph 24c.

See Paragraph 61c of FAS An example is given in SFAS Paragraph Also see IAS 39 Paragraph 24h. Equity Conversion Feature If an option is indexed to the issuer's own stock, a separate instrument with the same terms would be classified in stockholders' equity in the statement of financial position, so that the written option is not considered a derivative instrument.

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See FAS Paragraph 11a. If a debt instrument is convertible into a shares of the debtor's common equity stock or another company's common stock, the conversion option must be separated from the debt host contract.

That accounting applies only to the holder if the debt is convertible to the debtor's common stock. See FAS Paragraph 61k.

An example is provided in Paragraph of FAS Also see IAS 39 Paragraph 24f. Commodity-linked Notes A commodity-related derivative embedded in a commodity-indexed debt instrument must be separated from the host contract under FAS Paragraph 61i. Also see IAS 39 Paragraph 24e.

Bifurcation under FAS is not allowed in the following examples: Loan Prepayment Options these are not bifurcated. See Paragraphs 14,and of FAS and Paragraph 25e of IAS This also included prepayment options embedded in interest-only strips or principal-only strips that 1 initially resulted from separating the right to receive contractual cash flows of a financial instrument that, in and of itself, did not contain an embedded derivative and that 2 does not contain any terms not present in the original host debt contract IAS Paragraph 25f.

Contingent rentals these are not bifurcated. Examples include Contingent rentals based upon variable interest rates FAS Paragraph 68jrelated sales, inflation bonds FAS Paragraph There also is no bifurcation of a lease payment in foreign currency FAS Paragraphalthough the derivative should be separated if the lease payments are specified in a currency unrelated to each party's functional currency. Also see FAS Paragraph Also see IAS 39 Paragraph 25g. See IAS Paragraph 25b. Indexed amortizing note See Paragraph in FAS Also see IAS 39 Paragraph 25h.

Inverse Floater See Paragraphs and of FAS Bifurcation depends upon certain circumstances. Inverse floaters are separated if the embedded derivative could potentially result in the investor's not recovering substantially all of its initial recorded investment. In addition, Levered inverse floaters must be separated if there is a possibility of the embedded derivative increasing the investor's rate of return on the host contract to an amount that is at least double the initial rate of return on the host contract.

Also see IAS 39 Paragraph 25a. Some Foreign Currency Embedded Derivatives Dual Currency Bond FAS Paragraph and Short-Term Loan with a Foreign Currency Option FAS Paragraph if both the principal payment and the interest payments on the loan had been payable only in a fixed amount of a specified foreign currency, in which case remeasurement will be done according to SFAS 52 refer to paragraph However, foreign currency options not clearly and closely related to issuing a loan should be separated refer to FAS Paragraph Also see IAS 39 Paragraph 25c.

Appendix E in FAS beginning in Paragraph provides a flowchart for detecting embedded derivatives that must be bifurcated and accounted for separately. A FAS flowchart developed by Ira Kawaller and John J. Ensminger is reproduced at http: Recognition and Measurement of Derivatives. Unlike financial instruments in general, derivative financial instruments must be measured at fair value on the balance sheet.

For example, fixed-rate bonds are measured at amortized historical cost, but a swap of that bond interest is a derivative financial instrument that must be maintained at fair value. Or a forward contact intended to hedge the value of the bond must be maintained at fair value. By definition, most derivatives e. Since many such contracts are hedges of hedged items, the hedge contracts unlike the hedged items must be revalued at least quarterly.

Two major problems in adjusting to fair value marking to market are as follows: How to measure custom contract fair value such as forwards and swaps that are not traded in active markets. The main guidance is given in FASbut the guidance is very limited. Also, FAS has a "practicality exception" that does not extend to FAS It is impossible to measure hedge effectiveness without some estimate of fair value.

Whether to record changes in fair value as current earnings or as other comprehensive income OCI that came into being with FAS However, in the international standard IAS 39, the International Accounting Standards Committee allows for a similar accounting using some equity account other than retained earnings. The income-statement recognition of changes in the fair value of a derivative will depend on the intended use of the derivative.

If the derivative does not qualify as a hedging instrument or is not designated as such, the gain or loss on the derivative must be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either 1 also be recognized in income, along with an offsetting adjustment that is made to the basis of the item being hedged, or 2 be deferred in other comprehensive income i.

To qualify for special hedge accounting, the derivative must qualify either as a "fair value hedge," "cash flow hedge," or "foreign currency hedge. It should be stressed that many derivative contracts are not hedges, especially all speculative derivative instruments. Also some economic hedges cannot receive special hedge accounting treatment. For example, a recall option embedded in a fixed-rate note payable is an economic hedge that allows the debtor to recall the bonds if interest rates plunge.

This is a hedge in the sense that it becomes possible to refinance at lower interest rates. However, since the embedded recall provision does not have to recall option in office 2010 bifurcated and accounted for separately if it is considered "clearly-and-closely related," there is no special accounting provision for this economic hedge.

In a hedging strategy, a choice must be made forex expert advisors collection download to whether to hedge fair value or cash flow. It is impossible to hedge both at the same time. For example, if a company enters into a "firm commitment" with a fixed quantity and fixed price to purchase inventory at a future date, it is possible to hedge fair value but not cash flow.

If it is instead a "forecasted transaction with a fixed quantity and an unknown price it is possible to hedge the cash flow uncertainty due to the unknown price. In the inverse situation, an investor in a variable rate bond has no fair value risk by definition of a variable rate bond that moves up and down with market interest rate changes.

Such an investor can enter into a hedge of unknown cash flows, but to do so requires giving up the certainty that fair value is not at risk. F air Value Hedges.

A fair value hedge represents the hedge of an exposure to changes in the fair value of an asset, liability, or an unrecognized firm commitment that is attributable to a particular risk. Some common examples of fair value hedges include: Several criteria must be met for a hedging relationship to qualify as a fair value hedge. These criteria pertain to both the hedging instrument and the hedged item and are very prescriptive.

The excruciating level of detail in some of them illustrates quite well what many people believe to be a rather unfortunate state of affairs in U. The more important general criteria that must be met if a hedging relationship is to qualify as a fair value hedge are as follows: At the inception of the hedge, there is formal documentation of the hedging relationship and the entity's risk-management objective and strategy for undertaking the hedge.

This should include identification of the hedging instrument, the hedged item, the nature of the risk that is being hedged, and how the hedging instrument's effectiveness will be assessed.

There must be a reasonable basis for how the entity plans to assess the hedging instrument's effectiveness. In short, the entity must clearly state what it is doing.

Both at the inception of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective in achieving the offset of changes in fair value that are attributable to the hedged risk during the period that the hedge is designated.

An assessment of effectiveness is required whenever financial statements or earnings are reported, and at least every three months. In short, the entity must believe and regularly assess that its strategy will be effective.

The hedged item is a single asset, liability, or firm commitment, or is a specific portion thereof, or is a portfolio of similar items.

The FASB's interpretation of "similar" assets or liabilities in FAS if very narrow -- when it says "similar," it means very similar. The hedged item presents an exposure to changes in fair value that are attributable to a hedged risk that could affect reported earnings. For example, this criterion precludes hedge accounting for transactions related to an entity's equity accounts e. If the hedged item is a nonfinancial asset or liability, the designated risk that is being hedged is the risk of changes in the fair value of the entire hedged asset or liability reflecting its actual location, if it's a physical asset.

That is, the price risk of a similar asset in a different location or of a stock market hours thanksgiving friday after ingredient may not be the hedged risk. For example, if a derivative were used to hedge the exposure to changes in the fair value of tires held in inventory, the entity could not designate the market price of rubber as the hedged risk, even though rubber is a major component of the tires.

If the hedged item is a financial asset or liability, the designated risk that is being hedged can be the risk of a changes in the overall fair value of the entire hedged item or b changes that are attributable to changes in market interest rates, foreign currency exchange rates, or the obligor's creditworthiness. The hedging instrument must be a derivative. A nonderivative instrument, such as a treasury note, cannot be designated as a hedging instrument. For a qualifying fair value hedge, the gain or loss on the hedging instrument i.

The gain or loss i. This means that an asset or liability related to a firm commitment will appear on the balance sheet if the commitment is the subject of a fair value hedge.

Where the hedge is highly effective, the gains and losses generally will be equal and offsetting. Earnings will be affected only to the extent that the hedge is not percent effective. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as the other components of the carrying amount of the asset or liability. For example, adjustments to hedged gasoline inventory would remain part of the gasoline inventory balance until the inventory is sold.

With respect to interest-bearing financial instruments, the adjustment is amortized to earnings beginning no later than when the hedged item ceases to be adjusted for changes in its fair value that are attributable to the risk that is being hedged. All changes in value due to the derivative's changes in fair value are charged to current earnings. If the hedge does not qualify under FASthe firm commitment is not generally adjusted to fair value on the books.

Only the ineffectiveness amount impacts upon the net value of retained earnings. Click Here for Audio Clips About Fair Value Hedges http: When observing the hedging strategies of different entities, the FASB noticed that risk to some entities is the risk of a change in fair value, whereas to other entities it is the risk of a change in cash flows.

For example, fixed-rate debt issued by an entity subjects the entity to a potential change in the fair value of the debt, but the interest cash flows are not subject to variation. Floating-rate debt, on the other hand, is not subject to changes in its fair value as market interest rates change, but the interest cash flows may vary.

Thus was born the notion of a cash flow hedge. A cash flow hedge is a hedge of an exposure to variability in cash flows that is attributable to a stock brokers sullivan county risk. That exposure may be associated with an existing recognized asset or liability or a forecasted transaction such as a forecasted purchase or sale.

Some common examples include. As with fair value hedges, there are numerous prescriptive criteria that must be met in order for a hedging relationship to qualify as a cash flow hedge. They are similar to the qualifying criteria for fair value hedges, the more important of which inr us dollar exchange rate as follows.

At the inception of the hedge, there is formal documentation of the hedging relationship and the entity's risk-management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged cash flow transaction, the nature of the risk that is being hedged, and how the hedging instrument's effectiveness will be assessed.

Both at the inception of the hedge and on an ongoing basis, the hedging relationship is expected to be highly effective in offsetting the variability of cash flows that are attributable to the hedged risk during the term of the hedge. The forecasted transaction is specifically identified as a single transaction or a series of individual transactions.

If aggregated, the individual transactions must share the same risk exposure for which they are designated as being hedged. The occurrence of the forecasted transaction is probable. The forecasted transaction presents an exposure to variations in cash flow for the hedged risk, which could affect reported earnings.

If the hedged transaction is the forecasted purchase or sale of a nonfinancial asset, the designated risk that is being hedged is the risk of changes in the cash flows relating to all changes in the purchase price or sales price of the asset reflecting its actual location, if it's a physical assetnot the risk of changes in the cash flows relating to the purchase or sale of a similar asset in a different location or of a major ingredient.

If the hedged transaction is the forecasted purchase or sale of a financial asset or liability, or, the variable cash flows of an existing financial asset or liability, the designated risk that is being hedged can be the risk of changes in the cash flows of the entire asset or liability, or, those changes in cash flows that are attributable to changes in market interest rates, foreign currency exchange rates, or the obligor's creditworthiness or default.

Generally, this means that the balance sheet articulates the income statement. Sometimes, though, there is a tension between what is perceived as good for the balance sheet versus what is perceived as good for the income statement. For example, the LIFO method of inventory costing is usually viewed as meaningful for the income statement but of dubious merit for the balance sheet.

The FASB admits to a balance sheet priority in setting many of its standards in the past two decades. One binary options market maker the main reasons is concern over understated liabilities and off-balance-sheet financing.

FAS is one of the many standards where improved balance sheets result in volatile and confusing income statements. In fact, earnings volatility resulting from FAS and IAS 39 is the main reason for complaints raised by financial institutions and other corporations.

From time to time, accounting standard-setters have resolved this tension by allowing changes in balance-sheet assets and liabilities to bypass the income statement and go directly to equity. As recently required by the FASB, such items are now included in other comprehensive income.

Prior to FASU. GAAP provided for three such items: The FASB has now added a fourth item resulting from cash flow hedge accounting. Accounting for cash flow hedges involves the notion of other comprehensive income OCI. The effective portion of a hedging instrument's gain or loss is initially reported as a component of other comprehensive income outside of earnings and reclassified as earnings in the same period or periods during which the hedged forecasted transaction affects earnings for example, when a forecasted sale actually part time work from home without investment in ahmedabad. If the hedged transaction were to result in the acquisition of an asset or rim backdating stock options incurrence of a liability, the gains and losses that had accumulated in other comprehensive income would be reclassified as earnings in the same period or periods during which the asset acquired or the liability incurred affects earnings such as in the periods in which depreciation expense, interest expense, or cost of tesco buy shares are recognized.

This procedure ensures that the "earnings impact" in future periods is equal to the price or cost that the entity "fixed" or "locked in" by entering into the cash flow hedge. Click Here for Audio Clips About Cash Flow Hedges http: A foreign currency hedge can be a hedge of the foreign currency exposure of. Prior to the FAS amendments, the hedge could only be a cash flow hedge. FAS extended this to cross-currency fair value hedge such as a hedge of the value of variable rate note denominated in a foreign currency.

Although an available-for-sale security cannot have a fair value hedge since the hedged item is adjusted for value changes in its own currencyit can be hedged for foreign currency risk whether it is an inter-company investment or with a third party provided the following conditions are met: The accounting for a foreign currency fair value hedge and a foreign currency cash flow hedge follows the same principles as those that apply to the accounting for non-foreign currency hedges.

In a hedge of a net investment in a foreign operation, the gain or loss on the hedging instrument is reported in other comprehensive income outside of earnings as part of the cumulative translation adjustment as provided for in FAS 52, Foreign Currency Translation. Except for available-for-sale securities, FAS precludes a recognized foreign currency-denominated asset or liability pengalaman forex forum being a hedged item, because such an asset or liability is remeasured with the changes in carrying value attributable to what would be the hedged risk -- i.

The FASB's rationale for prohibiting a foreign currency-denominated asset or liability from being a hedged item is that the transaction gains and losses on the asset or liability arising from changes in exchange rates would naturally be, to a great extent, offset in the income statement by the changes in the fair value of the derivative.

Generally, FAS retains the hedge-accounting provisions currently in practice for foreign currency hedges. To accommodate this, the Standard makes a couple of exceptions to its overall hedge-accounting model.

The two exceptions relate to permitting 1 hedge accounting for a net investment in a foreign operation and 2 the designation of nonderivative financial instruments denominated in a foreign currency such as foreign currency debt as part of a hedge of a firm commitment or of a net investment. Both are continuations of practices permitted prior to FAS Two aspects of FAS that mark a notable departure from previous practice in the foreign currency area are 1 an entity's ability binary options ultimatum reviews paypal hedge forecasted transactions with foreign currency forward contracts or combination options and 2 an entity's ability to hedge with a tandem currency provided that effectiveness can be demonstrated.

Click Here for Audio Clips About Foreign Currency Hedges http: Perhaps the key qualifying criterion for hedge accounting under FAS is that the hedging relationship between the hedging instrument and the hedged item be highly effective in achieving the offset of changes in those fair values or cash flows that are attributable to the hedged risk, both at the inception of the hedge and on an ongoing basis.

An assessment of this effectiveness is required at least every three months and whenever financial statements or earnings are reported by the entity. This requirement is meant to have the same meaning and application as the "high correlation" assessment required by current accounting rules.

It does not mean that there must be a "reduction of risk," as was required under the pre-FAS hedge model. FAS requires that an entity, as part of the designation of a hedging relationship, define up front how it will assess a hedge's effectiveness in achieving the offset of changes in fair value or the offset of cash flows that are attributable to the risk that is being hedged.

In this regard, FAS requires that, throughout the hedge period, an entity consistently use a defined method to 1 assess whether it expects the hedging relationship to be highly metatrader 4 spread indicator in achieving offset and 2 measure the ineffective part of the hedge.

The Standard does not limit an entity to specifying a single method for assessing effectiveness and provides entities with a reasonable amount of flexibility. Generally, however, it would be expected than an entity would assess effectiveness for similar hedges in a similar manner.

Any changes that an entity might make to its method of assessing effectiveness would have to be justified and would be applied prospectively by there being a discontinuation of the existing hedging relationship and a new designation of the relationship through the use of the improved method.

Statistical techniques, such as regression analysis, and expectations about future changes based on various pricing models may often be used at the hedge's inception to assess the probable future effectiveness of a hedging relationship. The test of actual past effectiveness i. A common way of measuring the degree of ongoing effectiveness is to divide the cumulative price or cash flows change for the hedging instrument by the cumulative price or cash flows change of the hedged how to make money out of cooking runescape that is attributable to the risk that is being hedged.

Wilson livestock trailers for sale in canada there is not precise guidelines, in order for a hedging relationship to qualify for ongoing "high effectiveness," the changes in the fair value or cash flows of the hedging instrument must, at a minimum, be between 80 percent and percent on the inverse changes in the fair value or cash flows of the hedged item.

FAS requires the termination of hedge accounting for hedging relationships that are no longer "highly effective. Ineffectiveness is the degree ex ante to which a hedge fails to meet its goals in protecting against risk i. According to Paragraphs 20 on Page 11 and 30 on Page 21 of FASineffectiveness is to be defined ex ante at the time the hedge is undertaken. Hedging strategy and ineffectiveness definition with respect to a given hedge defines the extent to which interim adjustments affect interim earnings.

Hedge effectiveness requirements and accounting are sumwarized in Paragraphs beginning on Page 44 of FAS In Example 9, the definition of ineffectiveness in terms of changes in intrinsic value of a call option results in changes in intrinsic value each period being posted to other comprehensive income rather than earnings.

In Examples in Paragraphsdesignations as to fair value versus cash flow hedging affects the journal entries. One means of documenting hedge effectiveness is to compare the cumulative dollar offset defined as the cumulative value over a succession of periods e. When assessing the effectiveness of a hedge, an enterprise will generally need to consider the time value of money according to FAS Paragraph 64 and IAS 39 Paragraph Neither the FASB nor the IASC specify a single method for either assessing whether a hedge is expected to be highly effective or measuring hedge ineffectiveness.

Tests of hedge effectiveness should be conducted at least quarterly and on financial statement dates. The appropriateness of a given method can depend on the nature of the risk being hedged and the type of hedging instrument used.

See FAS Appendix A, Paragraph 62 and IAS 39 Paragraph In defining how hedge effectiveness will be assessed, an entity must specify whether it will include in that assessment all of the gain or loss on a hedging instrument. This Statement permits but does not require an entity to exclude all or a part of the hedging instrument's time value from the assessment of hedge effectiveness, as follows: If the effectiveness of a hedge forex bidvest an option contract is assessed based on changes in the option's intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.

If the effectiveness of a hedge with an option contract is assessed based on changes in the option's minimum value, that is, its intrinsic value plus the effect of discounting, the change in the volatility value of the contract would be excluded from the assessment of hedge effectiveness.

If the effectiveness of a hedge with a forward or futures contract is assessed based on changes in fair value attributable to changes in spot prices, the change in the fair value of the contract related to the changes in the difference singapore forex broker mt4 the spot price and the forward or futures price fas 133 put option be excluded from the assessment of hedge effectiveness.

Paragraph 69 of FAS reads as follows [ also see IAS 39 Paragraph ]: The fixed rate on cara nak mula main forex hedged item need not exactly match the fixed rate on a swap designated as a fair value hedge. Nor does the variable rate on an interest-bearing asset or liability need to be the same as the variable rate on a swap designated as a cash flow hedge.

A swap's fair value comes from its net settlements. The fixed and variable rates on a swap can be changed without affecting the net settlement if both are changed by the same amount. That is, a swap with a payment based on LIBOR and a receipt based on a fixed rate of 5 percent has the same net settlements and fair value as a swap with a payment based on LIBOR plus 1 percent and a receipt based on a fixed rate of 6 percent. The following Section c in Paragraph 65 on Page 45 is of interest with respect to a premium paid for a forward or futures contract: Either the change in the discount or premium on the forward contract is excluded from the assessment of effectiveness and included directly in earnings pursuant to Paragraph 63 or the change in expected cash flows on the forecasted transaction is based on the forward price for the commodity.

The FASB requires that an entity define at the time it designates a hedging relationship the method it will use to assess the hedge's effectiveness in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged FAS Paragraph The Statement permits but does not require an entity to exclude all or a part of the hedging instrument's time value from the assessment of hedge effectiveness.

FAS Paragraph Hedge ineffectiveness would result from the following circumstances, among others: The method an enterprise adopts for assessing hedge effectiveness will depend on its risk management strategy. In some cases, an enterprise will adopt different methods for different types of hedges.

For instance, an interest rate swap is likely to be an effective hedge if the notional and principal amounts, term, repricing dates, dates of interest and principal receipts and payments, and basis for measuring interest rates are the same for the hedging instrument and the hedge item IAS 39 Paragraph Sometimes the hedging instrument will offset the hedged risk only partially.

For instance, a hedge would not be fully effective if the hedging instrument and hedged item are denominated in different currencies and the two do not move in tandem.

Accounting for Derivatives - FAS

IAS 39 Paragraph Especially note the section of Short-Cut Method for Interest Rate Swaps. See further paragraphs for illustrations of assessing effectiveness and measuring ineffectiveness: Fair Value Hedge of Natural Gas Inventory with Futures Contracts FAS Paragraphs Fair Value Hedge of Tire Inventory with a Forward Contract FAS Paragraphs Fair Value Hedge of Growing Wheat with Futures Contracts FAS Paragraphs Fair Value Hedge of Equity Securities with Option Contracts FAS Paragraphs Fair Value Hedge of a Treasury Bond with a Put Option Contract FAS Paragraphs Fair Value Hedge of an Embedded Purchased Option with a Written Option FAS Paragraphs Cash Flow Hedge of a Forecasted Purchase of Inventory with a Forward Contract FAS Paragraphs Cash Flow Hedge with a Basis Swap FAS Paragraphs Cash Flow Hedge of Forecasted Sale with a Forward Contract FAS Paragraphs Attempted Hedge of a Forecasted Sale with a Written Call Option FAS Paragraphs Note especially DIG Issue E7 at http: Click Here for Audio Comments by Experts on Effectiveness http: Discontinuance of Hedge Accounting.

Under FASan entity would discontinue hedge accounting if 1 a hedge were to fail to meet any of the qualifying criteria of FAS or 2 the derivative were to expire or be sold, terminated, exercised, or simply dedesignated as a hedging instrument.

The accounting for the discontinuance of a hedge depends on the reason for the discontinuance. Generally, discontinuance will not have an immediate effect on earnings -- for either fair value hedges or cash flow hedges -- with two exceptions. In a fair value hedge of a firm commitment, it is possible that the firm commitment will no longer qualify as such. In this expected-to-be-rare situation, any asset or liability that had been recognized through cumulative mark-to-market adjustments of the firm commitment will be removed from the balance sheet, and a corresponding gain or loss will be recorded in earnings.

In a cash flow hedge of a forecasted transaction, it is possible that an entity may later determine that it is probable that the forecasted transaction will not occur. In this situation, the gain or loss that had accumulated in other comprehensive income will be recognized immediately in earnings. Note here a subtle but deliberate use of words by the FASB. In order to preclude situations in which an entity might manipulate earnings by changing its estimate of probability i.

The disclosure requirements of FAS are quite extensive. The Standard requires certain general disclosures, quantitative disclosures for certain "failed" hedges, and some additional disclosures for cash flow hedges and hedges of a net investment in a foreign operation, as follows: The entity's objectives and strategies for holding and issuing derivatives, and a description of the items or transactions for which risks are hedged. The net gain or loss recognized in earnings for the period representing aggregate ineffectiveness for all hedges, and the components of the derivatives' gains or losses excluded from the assessment of hedge effectiveness.

Disclosure of certain "failed" hedges: FAS requires an entity to disclose the amount of gains and losses recognized in earnings as a result of 1 a previously hedged firm commitment that becomes no longer firm for example, the commitment is canceled or 2 a previously hedged forecasted transaction that becomes not probable of occurring. Additional cash flow hedge disclosures: A description of the forecasted transactions being hedged, the maximum period of time before the transactions are expected to occur, and the transactions or other events that will result in the recognition in earnings of gains and losses that have accumulated in other comprehensive income.

An estimate of the amount of gains and losses included in other comprehensive income that will be recognized in earnings within the next twelve months. Changes in the components of other comprehensive income: FAS requires an entity to display within other comprehensive income the net gain or loss on derivative instruments that are both designated as and qualify as cash flow hedges.

In addition, beginning and ending accumulated derivative gains and losses, the related change associated with current-period transactions, and the amount of any reclassification as earnings are also required to be displayed pursuant to FASReporting Comprehensive Income.

Additional net-investment hedge disclosures: Effective Date and Transition. FAS implementation deadlines were delayed by the FASB. It is now effective for all fiscal quarters of fiscal years beginning after June 15, and January 1,for calendar-year entities.

The Standard can be implemented early, as of the beginning of any fiscal quarter subsequent to the Standard's issuance i. As might be expected, accounting for the transition to such a markedly different approach for derivatives and hedging is rather complex.

Upon adoption of the Standard, all derivatives must be recognized on the balance sheet at their then fair value. Any stand-alone deferred gains and losses remaining on the balance sheet under previous hedge-accounting rules must be removed from the balance sheet, since the FASB determined that they don't meet the definition of an asset or liability. All hedging relationships must be designated anew and documented pursuant to the new accounting rules.

In many cases, the designations will be consistent with the hedging purpose that had been previously in place. However, in some cases, the hedge relationship may not qualify for hedge accounting under FAS The initial designation upon the adoption of the Standard will serve as the basis for the transition adjustments made in the financial statements e. In the period of adoption, the transition adjustments will include 1 a net effect on earnings, if the hedge relationship is designated as a fair value hedge and 2 a net effect on other comprehensive income, if the hedge relationship is designated as a cash flow hedge.

FAS 's transition provisions permit, at the date of initial application, entities to reclassify any held-to-maturity security as either an "available-for-sale" or "trading" security so that, in the future, they may be able to designate such a security as the hedged item in a fair value hedge or designate its variable interest payments as the hedged item in a cash flow hedge. Held-to-maturity securities generally cannot otherwise be hedged. Any reclassification of held-to-maturity securities pursuant to the adoption of FAS will not, however, call into question an entity's intent to hold other debt securities to their maturity in the future.

Public companies that choose not to adopt FAS early must follow the disclosure requirements of SEC Staff Accounting Bulletin No. Beginning with the first quarterly report issued after June 15,such disclosures should include. Audio Clip on Timing and Transition http: Common Risk-Management Strategies Under FAS Here are a number examples of common strategies and a brief analysis of how FAS affects these strategies.

Identify all embedded dervatives and evaluate whether they have to be bifurcated under FAS rules. This entails an organized effort, sometimes worldwide, to have trained FAS employees examine active financial contracts.

It is especially troublesome in Asia where the business culture is one of trust rather than written documentation and contracting on paper.

Roger Pearson at Union Carbide CARBR Audio Clip on Costs of Detection and Documentation http: Derivatives such as interest-rate options, futures, or forward contracts can accomplish this objective. Example 9 beginning in Paragraph illustrates use of a swap. Under FASsuch a hedging strategy would constitute a cash flow hedge, provided that all requisite conditions of Paragraphs are met. The effective portion of the hedge is closed to OCI each time the derivative is marked to market at least quarterly.

My CapIt and FloorIT Bank cases illustrate using Eurodollar options as hedges of interest rates on forecasted transactions. Note that cash flow hedge gains and losses are not automatically closed to OCI. Effectiveness must be tested. The ineffective portion due to over-hedging must be closed to current earnings.

Martin Klein from Lehman Brothers http: A company issues variable-rate debt e. Or a company invests at a variable rate and hedges the variability of interest income. Prior to FASaccounting for these situations followed what became known as " synthetic-instrument accounting.

Under FASthis technique should qualify as a cash flow hedge, with essentially the same income-statement effect as before. The balance sheet, of course, will now be grossed up to reflect the swap's fair value and its changes in fair value that are deferred in other comprehensive income. It is worth noting, however, that FAS requires that a specific swap be designated as hedging a specific debt instrument or instruments or portions thereof to qualify for hedge accounting.

Previously, some companies took a broader view of things, designating a portfolio of swaps as being linked to a portfolio of debt instruments.

It is important to note that if an interest rate swap satisfies effectiveness criteria for the shortcut method as illustrated in Paragraph of FASthen it is not necessary to test for effectiveness every quarter of the hedge. The hedging of a variable interest investment is illustrated in Example 5 of FAS beginning in Paragraph Jensen and Hubbard make some corrections in this example and elaborate upon how answers are derived at http: The problem is that FAS 52 uses spot rates and FAS requires forward rates.

These two rates are often not sufficiently correlated to avoid ineffectiveness. Jin Chang from Lehman Brothers http: Convert nonprepayable fixed-rate debt into variable-rate debt by using an interest-rate swap This common technique is the mirror image of the one just described.

However it is a fair value hedge rather than a cash flow hedge.

A company issues fixed-rate debt and, by entering into an interest-rate swap whereby the company receives a payment based on a fixed interest rate and makes a payment based on a variable interest rate, synthetically creates variable-rate debt.

The popularity of both this and the previous technique comes from arbitrage opportunities in the various interest-rate markets, thus creating lower borrowing costs for companies. Prior to FASsynthetic-instrument accounting was followed, with the effect being that the income statement was the same as if the company actually had issued variable-rate debt.

Under FASthis technique should qualify as a fair value hedge, with essentially the same income-statement effect as before. However, unlike previous practice under the rather broad umbrella of synthetic-instrument accounting, hedge accounting for this technique may not be available for a plain-vanilla interest-rate swap if the underlying fixed-rate debt is prepayable or callable, because the changes in the debt's fair value may not be highly effective in offsetting the changes in the swap's fair value that are due to changes in market interest rates.

An illustration of the use of a swap to hedge the fair value of an investment is illustrated in Example 2 of FAS beginning in Paragraph Jensen and Hubbard elaborate on this illustration in http: Monetize an embedded call option in existing callable fixed-rate debt As interest rates declined over the s, companies increasingly entered into various transactions to monetize embedded call options in existing callable fixed-rate debt.

A typical situation involves a company that has outstanding callable fixed-rate debt. Due to a decline in interest rates, it would be advantageous to the company to call the debt and refinance at lower interest rates.

However, the call provision is not exercisable until some contracted time in the future. By writing a separate option that effectively neutralizes the purchased call option embedded in the debt, the company receives cash currently. Prior to FASit was somewhat difficult to achieve hedge accounting for such transactions, due to the SEC staff position that hedge accounting was inappropriate for freestanding written options; companies had to resort to more complicated structures.

FAS makes it easier to achieve hedge accounting for call monetizations because, assuming that all the conditions are met, a freestanding written option can qualify as a fair value hedge of an embedded purchased option. Protect against the weakening of a foreign currency for anticipated export sales by a U.

FASwhich treats such a forecasted transaction as a cash flow hedge, makes this process much easier than it was previously by allowing foreign currency forward contracts to be used and achieve hedge accounting. Under prior rules and practice, only purchased options which many companies viewed as too expensive could qualify for hedge accounting with respect to these forecasted transactions. Also, FAS is more liberal than the previous rule in permitting a so-called "tandem currency" to be used in foreign currency hedging.

A tandem currency is one that is expected to move in tandem with the currency that represents the actual foreign currency exposure. Protect against the strengthening of a foreign currency when the U. Assume, for example, that a U. To lock in the dollar cost of the equipment, the U. Consistent with current rules, such a transaction would qualify as a fair value hedge under FAS i. The income-statement effects would be largely unchanged from previous accounting practices. An illustration of this type of hedge is provided in Example 10 beginning in Paragraph of FAS Protect against the weakening of a foreign currency for anticipated sales by a foreign subsidiary whose functional currency is not the foreign currency in which the sales will occur This is a convoluted way of addressing a situation in which, for example, a U.

It is similar to the export-sale situation described in item 5 above, and the hedging strategy would be similar. However, FAS introduces a requirement that could have significant practical implications for multinational entities that use centralized treasury centers TCs for hedging foreign currency risk. In such a structure, the TC receives information about foreign currency exposures from a number of foreign subsidiaries. The TC first attempts to offset these exposures within the consolidated group and then enters into hedging contracts for only the next exposure.

FAS requires that, in order for these structures to qualify for hedge accounting, there must be 1 an intercompany hedging contract between the foreign subsidiary and the parent or TC and 2 another hedging contract between an independent third party and the parent or TC.

Essentially, the parent or TC must act as an intermediary between the foreign subsidiary and a third party, and the hedging gain or loss must be "pushed down" to the subsidiary.

The problem is that the new rules may restrict the ability of the TC to enter into a net contract by requiring that the parent or TC enter into contracts with third parties for "gross" amounts that is, separate contracts for all long positions and short positionswithout internal netting of currency exposures.

Accordingly, entities with centralized treasury operations may now have to incur additional transaction costs and increased counterparty risk. Relevant paragraphs in FAS include Paragraphs 40 and Protect against the weakening of a foreign currency for a net investment in a foreign subsidiary The hedging strategy seeks to maintain the dollar value of a company's investment in one or more foreign subsidiaries whose functional currency is the local currency.

It sometimes is used as a surrogate for hedging anticipated dividends from a foreign subsidiary. Foreign currency forward contracts, options, or nonderivative financial instruments, such as foreign currency debt, can all be used as the hedging vehicle.

This is one of only two areas the other being the hedge of a foreign currency firm commitment where FAS permits nonderivatives to qualify as hedges. The accounting for this hedging strategy is largely unchanged from that of previous practice. Lock in the current price of a precious metal, such as gold, for anticipated sales of future production This hedging strategy often involves the use of forward contracts or option combinations that can be settled net.

Prior to FASthere had been considerable uncertainty as to whether these types of transactions should be accounted for under the hedge-accounting rules or, rather, thought of simply as contracts for the sale of goods.

The forecasted purchase of lumber inventoried at cost can be a hedged item, but the forecasted purchase of gold or some other "precious" market commodity cannot qualify for OCI deferral as a hedged item.

The "political issue" issue faced by the FASB is merely a matter of when gains and losses on the derivative contract are posted to current earnings. If the commodity is "precious" gold, however, there is no intervening credit to OCI because of Paragraph 29d on Page 20 of FAS If the purchase is a firm commitment, however, it cannot be a cash flow hedge.

If it is not net settled it also cannot be a derivative. The exception is for contracts that, by their terms, a require delivery of the asset subject to the contract, b are not traded on an exchange, c are for quantities that are reasonable in relation to the company's business activities, and d cannot be settled net.

Contracts that meet criteria a - d are considered normal sales and, thus, would be accounted for as such according to Paragraphs A derivative that is used to fix the price of anticipated future sales will be a cash flow hedge under FAS if the derivative does not meet the aforementioned criteria and, thus, the specific exception for normal sales. A Decision Flowchart for FAS A FAS flowchart developed by ," Ira Kawaller and John J.

Unfortunate Consequences of FAS and IAS Probably the most unfortunate consequence is that firms that tend to hedge portfolios of financial assets and liabilities rather than individual components of the portfolio now must, except in unlikely circumstances, drill down to each component and link a hedge to each component rather than the portfolio as a whole.

The only exception is when all items in the portfolio are nearly identical in terms of risk and maturity dates. Very few portfolios meet those conditions. Click Here for Audio Clips About Portfolio Issues http: The consequence of having to change from portfolio hedging strategies to item hedging is only one of many unfortunate consequences of FAS and IAS Click Here for Audio Clips by Experts on FAS Controversies http: Other unfortunate consequences of FAS and IAS 39 are the reactions of companies, security analysts, and investors to the fact of or efforts to mitigate the fact of earnings volatility and liability reporting.

Purportedly, some of our most prominent companies are sub-optimizing due to fears that better economic decisions e. If you are reading this online and can play WAV files, click on the following examples of audio statements by some of the leading experts in the world. One such company is Union Carbide. Roger Pearson Manager of Accounting Research at Union Carbide CARBR Additional Audio Clips by Experts http: Bob Jensen's Home page is at http: To fax an order, you may either: A Report on the Similarities and Differences between IASC Standards and U.

GAAP SECOND EDITION, October at http: Recommended Tutorials on Derivative Financial Instruments but not about FAS or IAS 39 You might start at http: For example, Paragraph 58c reads as follows: If fair value hedges never impact on OCI, won't the net income be the same under FAS and simple fair value adjustments of derivative financial instruments? In other words, why make such a big deal over whether or not the derivative qualifies as a fair value hedge?

Click Here for Audio Clips on Effectiveness Controversies http: Evaluating Hedging Strategies 1: Evaluating Hedging Strategies 2: