Accounting and Disclosure for Derivative Instruments, written by Christian Johnson, J.D., CPA, with Loyola University, Chicago School of Law and Mary Grossman, J.D., CPA, explains both how to account for derivatives and how to disclose transactions in derivatives. These rules are primarily found in Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Transactions (FAS 133), and in regulations promulgated by the Securities and Exchange Commission (SEC).
For the benefit of readers seeking only an overview of the subject, this Portfolio begins with a description of the derivatives subject to FAS 133, transactions excluded from its scope, and disclosure requirements.
From there, Accounting and Disclosure for Derivative Instruments describes these rules in detail. It reviews the development of Generally Accepted Accounting Standards for derivative instruments, defines derivatives, explores the scope of instruments subject to FAS 133, and explains how to account for derivatives. This Portfolio also specifies the disclosure requirements imposed by the FASB and the SEC, respectively.
This Portfolio's worksheets provide extensive sample documentation for establishing hedging relationships and set forth relevant professional standards and other source materials.
Accounting and Disclosure for Derivative Instruments allows you to benefit from:
This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more.
Detailed Analysis
I. Summary of Rules and Scope of Portfolio
Introductory Material
A. Underlying Principles
B. Overview of Guidance
C. Implementation Challenges
D. Derivatives Subject to FAS 133
E. Transactions Excluded From FAS 133
F. Embedded Derivatives
G. Accounting for Derivatives Used in Hedge Transactions
1. Fair Value Hedges
2. Cash Flow Hedges
3. Foreign Currency Hedges
H. Disclosure of Transactions in Derivatives
I. International Accounting Standards
J. Coverage and Scope of Portfolio
II. Introduction to Derivatives
A. Nature of a Derivative
1. Options
2. Forwards
3. Categories of Derivatives
B. Exchange-Traded Derivatives
1. The Exchange-Traded Derivatives Market
2. Exchange-Traded Derivatives: Futures and Options
3. Futures Transaction Example
4. Uses of Exchange-Traded Derivatives
C. Over-the-Counter Derivatives
1. The OTC Derivatives Market
2. OTC Derivative Transactions
a. Legislative Definitions
b. Expanded Definitions
3. Interest Rate Swaps and Hedging - An Example
4. Other Hedging Examples
5. Speculation
6. Valuation of Derivatives
III. Development of Generally Accepted Accounting Standards for Derivative Instruments
A. Guidance Preceding FAS 133
1. FAS 80, Accounting for Futures Contracts
2. FAS 105, Disclosure of Information About Certain Financial Instruments
3. FAS 119, Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments
B. Recognition of the Need for FAS 133
C. Publication and Effective Date of FAS 133
D. Guidance Since FAS 133
1. FAS 138-Accounting for Certain Derivative Instruments and Certain Hedging Activities-An Amendment of FASB Statement No. 133
2. Derivatives Implementation Group
3. FAS 161-Disclosures about Derivative Instruments and Hedging Activities-An Amendment of FASB Statement No. 133
4. Possible Amendments of FAS 133
IV. Definition of a Derivative Under FAS 133 and Scope of Instruments Covered by FAS 133
A. Overview
B. Definition of Derivative Under FAS 133
1. Historical Background
2. Definition Based on Characteristics
C. Existence of Underlying and Notional Amount
1. Underlyings
a. General Description of Underlyings
b. Exception for Certain Underlyings Where Contract Not Exchange Traded
2. Notional Amounts
D. Initial Net Investment
E. Net Settlement
1. Contract Requires or Permits Net Settlement
a. Effect of a Nonperformance Penalty
b. Effect of an Asymmetrical Default Provision
c. Effect of Structured Payout Provision
d. Effect of Net Share Settlement in Securities Contracts
2. Market Mechanism Facilitates Net Settlement
3. Asset to Be Delivered Is Convertible to Cash or Is a Derivative
F. Contracts Outside the Scope of FAS 133
1. "Regular-Way" Security Trades
2. Normal Purchases and Normal Sales
3. Insurance Contracts
4. Certain Financial Guarantee Contracts
5. Certain Contracts That Are Not Traded on an Exchange
6. Derivatives That Serve as Impediments to Sales Accounting
7. Certain Investment Contracts
8. Loan Commitments
9. Registration Payment Arrangements
a. Definition and Scope of Registration Payment Arrangements
b. Arrangements Analogous to Registration Payment Arrangements
G. Contracts Outside the Scope of FAS 133 With Respect to the Reporting Entity
1. Contracts Indexed to Stock and Reported in Stockholder's Equity
2. Contracts for Stock-Based Compensation Arrangements
3. Consideration for a Business Combination
4. Contracts Requiring Issuer to Repurchase Its Stock for Cash
H. Embedded Derivatives
1. Separate Accounting-Bifurcation
a. Three Criteria for Separate Accounting
b. Not Clearly and Closely Related
2. Exceptions to Separate Accounting
a. Large Impact Interest Rate Embedded Derivatives
b. Interest-Only and Principal-Only Strips
c. Securitized Financial Assets and Liabilities
d. Some Foreign Currency Embedded Derivatives
e. Embedded Derivatives Included in Hybrid Instruments Reported at Fair Value
3. Embedded Derivatives That No Longer Meet Bifurcation Criteria
V. Accounting for and Reporting Derivative Instruments
A. Perspective and Basic Concepts
B. Fair Value of a Derivative Instrument
C. Earnings Effect of a Derivative Not Designated as a Hedge
D. Derivatives Used as Hedges
E. Fair Value Hedges
1. Definition of a Hedged Item
a. Portfolios of Similar Assets and Liabilities as Hedged Items
b. Hedged Items That Are Less Than an Entire Asset or Liability
c. Other Requirements of Hedged Items
2. Designation of the Derivative as a Fair Value Hedge
a. Identification of Hedging Instrument
(1) Assessing Hedge Effectiveness
(2) Shortcut Method
b. Requirement That Hedge Will Be Highly Effective
c. Equal Potential for Gain and Loss
3. Accounting for Gains and Losses on Fair Value Hedges
a. Change in Value of the Hedging Instrument
b. Change in Value of the Hedged Item
c. Examples
(1) Inventory as Hedged Item-No Ineffectiveness
(2) Inventory as Hedged Item-Some Ineffectiveness
d. Consequence of Change in Hedge Effectiveness
e. Discontinuance of Firm Commitment
f. Asset Impairment or Increased Obligation
F. Cash Flow Hedges
1. Definition of the Hedged Forecasted Transaction
2. Designation of the Derivative as a Cash Flow Hedge
a. Identification of the Hedging Instrument
b. Requirement That Hedge Be Highly Effective
d. Special Requirement for Basis Swaps
3. Accounting for Gains and Losses From Cash Flow Hedges
b. Adjusting Accumulated Other Comprehensive Income
c. Transferring Accumulated Other Comprehensive Income to Earnings
d. Examples
(1) Inventory Purchase as Hedged Transaction
(2) Inventory Purchase as Hedged Transaction-Hedge Purchased Two Periods Before Inventory Purchase
e. Discontinuance of the Cash Flow Hedge
f. Asset Impairment or Increase Obligation
G. Foreign Currency Hedges
1. Foreign Currency Fair Value Hedges
a. Foreign Currency Fair Value Hedges of Unrecognized Firm Commitments
b. Recognized Assets and Liabilities
c. Available-for-Sale Securities
2. Foreign Currency Cash Flow Hedges
a. Internal Derivatives
3. Hedges of Foreign Currency Exposure of Net Investment in Foreign Operations
VI. FAS 133 Financial Statement Disclosure Requirements
A. Introduction
1. Disclosures' Relevant Standards and Effective Dates
2. Scope of Section VI
B. Fundamental Principles
C. Superseded Disclosure Requirements
D. General Requirements
1. Disclosure of Adoption of FAS 133
2. Scope of Disclosure Requirements
3. Extent of Required Disclosure
4. Cross-Reference Requirement
E. Disclosures in Body of Financial Statements
1. Example-Money Center Bank
2. Example-Large Pharmaceutical Company
F. Qualitative Disclosures in Notes
1. Overall Objectives of FAS 133 Disclosures
2. Required Disclosures
a. Objectives and Strategies for Using Derivative Instruments by Underlying Risk
b. Volume of Derivative Activity
3. Encouraged Disclosures
G. Quantitative Disclosures
1. Required Disclosures
a. Disclosures in Tabular Format
(1) Location and Fair Value Amounts of Derivatives Reported
(2) Location and Amounts of Gains and Losses Reported
b. Disclosures Regarding Credit-Risk-Related Contingent Features
c. Disclosures Regarding Hybrid Financial Instruments
d. Disclosures Regarding Fair Value Hedges
e. Disclosures Regarding Cash Flow Hedges
(1) Accumulated Other Comprehensive Income
(2) Variability
(3) Discontinued Cash Flow Hedges
2. Encouraged Disclosures
H. Changes in Components of Comprehensive Income
I. Disclosures of Registration Payment Arrangements
J. Supplemental Disclosures for an Embedded Conversion Option Previously Disclosed as a Derivative
VII. Securities and Exchange Commission Disclosure Requirements
A. SEC Market Risk Disclosure Rules
1. Background
2. Regulation S-X
3. Regulation S-B
4. Regulation S-K
5. Form 20-F
B. Applicable Instruments
1. Derivative Financial Instruments
2. Derivative Commodity Instruments
3. Other Financial Instruments
4. Market Risk Sensitive Instruments
5. Other Market Risk Sensitive Instrument
C. Accounting Policy Disclosures
1. Required Accounting Policy Disclosures
2. Materiality
3. Trading Purposes
4. Anticipated Transactions
D. Market Risk Disclosures
1. Introduction
3. Presentation of Information
E. Quantitative Market Risk Disclosures
1. Material Limitations
2. Prior-Year Information
3. Tabular Presentation of Information
a. Objective
b. Form of Presentation
c. Key Contract Terms
d. Categorization for Different Market Risk Groups
e. Commodity Price Risk Category
f. Changes in More Than One Market Risk Category
g. Special Rules for Currency Swaps
4. Sensitivity Analysis Disclosures
b. Model, Assumptions, and Parameters
c. Hypothetical Changes in Market Rates or Prices
d. Reasonably Possible
e. Near Term
g. Foreign Currency Exposures
5. Value at Risk Disclosures
b. Required Information
c. Confidence Intervals
d. Foreign Currency Exposures
F. Qualitative Disclosures
G. Interim Periods
H. Safe Harbor for Forward Looking Information
I. Small Business Issuers
J. Non-Market Risk Disclosures Required by Regulation S-K
1. Liquidity
2. Operational Risks
3. Off-Balance Sheet Arrangements
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Status of Statement No. 133
Worksheet 2 Guidance on Statement 133 Implementation Issues
Worksheet 3 The Impact of the Issuance of Statement 133 on Then-Existing Consensuses for EITF Issues
Worksheet 4 SEC Release: Disclosure of Accounting Policies for Derivative Financial Instruments 17 C.F.R. Part 210
Worksheet 5 List of OTC Derivative Transaction Structures
Worksheet 6 Format of Tabular Disclosures - Appendix to Item 305
Worksheet 7 Sample Documentation for Establishing Hedging Relationship and Risk Management Objective and Strategy for Undertaking Hedge
Worksheet 8 Sample Reporting and Disclosing of Derivatives by Public Companies
Worksheet 9 List of Significant Accounting Pronouncements Principally Discussed
Worksheet 10 Sample Compliant Qualitative Disclosures Pre-FAS 161
Worksheet 11 Sample Compliant Quantitative Disclosures Pre-FAS 161
Worksheet 12 Example Tabular Disclosures
Worksheet 13 Example 44C(c) Election to Disclose Nondesignated/Nonqualifying Derivative Instruments That Are Included in an Entity's Trading Activity
Worksheet 14 Example Disclosure of Contingent Features in Derivative Instruments
Worksheet 15 Examples of Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock
Bibliography
OFFICIAL
Federal Regulations and Codes
American Institute of Certified Public Accountants:
AICPA Statements of Position
Other AICPA Texts
Commodity Futures Trading Commission
Federal Reserve Board
Financial Accounting Standards Board:
Emerging Issues Task Force
FASB Financial Accounting Standards
FASB Interpretations
FASB Staff Positions
FASB Implementation Issues
Other FASB Texts
General Accounting Office
Securities and Exchange Commission:
SEC Releases
SEC Filings
UNOFFICIAL
Periodicals
Books
Other Texts
Internet Sources
Other