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Accountants' Handbook, Volume Two, Special Industries and Special Topics, 12th Edition by Lynford Graham, D. R. Carmichael

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Chapter 26

Accounting for Derivatives: A Primer

Ira G. Kawaller

Kawaller & Co

26.1 Overview

26.2 Definition of a Derivative

26.3 Exemptions

26.4 Embedded Derivative Instruments

26.5 Accounting Treatment

(a) Cash Flow Hedges

(i) Exposures That Qualify for Cash Flow Hedge Accounting

(ii) Eligible Risks

(iii) Prerequisite Requirements

(iv) Disallowed Situations

(v) Internal Derivatives Contracts

(b) Fair Value Hedges

(i) Examples

(ii) Eligible Risks

(iii) Prerequisite Requirements

(iv) Disallowed Situations

(c) Hedges of Net Investments in Foreign Operations

(d) Hedge Effectiveness

(e) Speculative Trades or Trades Not Qualifying for Hedge Accounting

26.6 Disclosures

(a) All Reporting Entities

(b) Hedging

(c) Fair Value Hedges

(d) Cash Flow Hedges

26.7 International Financial Reporting Standards and Derivatives

26.8 Sources and Suggested References

26.1 Overview

It would be easy for us to dismiss [derivatives] as [investment products] only sophisticated investors use minimizing any impact to our economy.…If we think back to the collapse of Enron, or even farther back to Long-Term Capital Management, we understand how the abuse of derivatives can have a negative impact not only on the parties to the contract, but also on the market and the economy.

—Rep. Richard Neal, D-Mass., chairman of the House Ways and Means Select Revenue Measures Subcommittee, at a March 5 (2008) hearing on tax treatment of derivatives

Originally issued as Financial Accounting Statement (FAS) No. 133, Accounting ...

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