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Not surprisingly, many of you are struggling with the accounting
standards and principles required for derivative financial
instruments.<br><br>
The dominant standard for accounting for derivative financial statements
is FASB Statement 133: Accounting for Derivative Instruments and Hedging
Activites.<br><br>
I have appended the official "Summary" of FAS 133 for
you. I would be willing to try to answer questions that you
have.<br><br>
Keep in mind that FAS 133 runs over 500 paragraphs and has been amended
numerous times since its release in 1998.<br><br>
Despite it's length, the underlying standard is rather crisp as noted by
the standard in Paragraph 17:<br><br>
<blockquote type=cite class=cite cite="">
<font face="Arial, Helvetica" size=1><b>Recognition of Derivatives and
Measurement of<br>
Derivatives and Hedged Items<br>
</b></font><font face="Arial, Helvetica" size=1>17. An entity shall
recognize all of its derivative instruments<br>
in its statement of financial position as either<br>
assets or liabilities depending on the rights or obligations<br>
under the contracts. All derivative<br>
instruments shall be measured at fair
value.</font><font face="Arial, Helvetica"></font></blockquote><br>
Here is the Summary:<br><br>
<blockquote type=cite class=cite cite="">
<font face="Arial, Helvetica" size=3><b>SUMMARY<br>
</b></font><font face="Arial, Helvetica" size=1>This Statement
establishes accounting and reporting standards for derivative
instruments, including certain<br>
derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging<br>
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial<br>
position and measure those instruments at fair value. If certain
conditions are met, a derivative may be<br>
specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability<br>
or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted<br>
transaction, or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized<br>
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted<br>
transaction.<br>
</font><font face="Arial, Helvetica" size=2><b><i>Accounting for
Derivative Instruments
</i></font><font face="Arial, Helvetica" size=3>FAS133<br>
</font><font face="Arial, Helvetica" size=2><i>and Hedging
Activities<br>
</i></b></font><font face="Helvetica, Helvetica">FAS133–3<br>
</font><font face="Arial, Helvetica" size=1>The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends on the
intended<br>
use of the derivative and the resulting designation.<br>
</font><font face="Symbol" size=1>•
</font><font face="Arial, Helvetica" size=1>For a derivative designated
as hedging the exposure to changes in the fair value of a recognized
asset or<br>
liability or a firm commitment (referred to as a fair value hedge), the
gain or loss is recognized in earnings<br>
in the period of change together with the offsetting loss or gain on the
hedged item attributable to the risk<br>
being hedged. The effect of that accounting is to reflect in earnings the
extent to which the hedge is not<br>
effective in achieving offsetting changes in fair value.<br>
</font><font face="Symbol" size=1>•
</font><font face="Arial, Helvetica" size=1>For a derivative designated
as hedging the exposure to variable cash flows of a forecasted
transaction (referred<br>
to as a cash flow hedge), the effective portion of the derivative’s gain
or loss is initially reported as a<br>
component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings<br>
when the forecasted transaction affects earnings. The ineffective portion
of the gain or loss is reported in<br>
earnings immediately.<br>
</font><font face="Symbol" size=1>•
</font><font face="Arial, Helvetica" size=1>For a derivative designated
as hedging the foreign currency exposure of a net investment in a foreign
operation,<br>
the gain or loss is reported in other comprehensive income (outside
earnings) as part of the cumulative<br>
translation adjustment. The accounting for a fair value hedge described
above applies to a derivative<br>
designated as a hedge of the foreign currency exposure of an unrecognized
firm commitment or an<br>
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative<br>
designated as a hedge of the foreign currency exposure of a
foreign-currency-denominated forecasted<br>
transaction.<br>
</font><font face="Symbol" size=1>•
</font><font face="Arial, Helvetica" size=1>For a derivative not
designated as a hedging instrument, the gain or loss is recognized in
earnings in the<br>
period of change.<br>
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of<br>
the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement<br>
approach for determining the ineffective aspect of the hedge. Those
methods must be consistent with the entity’s<br>
approach to managing risk.<br>
This Statement applies to all entities.Anot-for-profit organization
should recognize the change in fair value<br>
of all derivatives as a change in net assets in the period of change. In
a fair value hedge, the changes in the fair<br>
value of the hedged item attributable to the risk being hedged also are
recognized. However, because of the<br>
format of their statement of financial performance, not-for-profit
organizations are not permitted special hedge<br>
accounting for derivatives used to hedge forecasted transactions. This
Statement does not address how a notfor-<br>
profit organization should determine the components of an operating
measure if one is presented.<br>
This Statement precludes designating a nonderivative financial instrument
as a hedge of an asset, liability,<br>
unrecognized firm commitment, or forecasted transaction except that a
nonderivative instrument denominated<br>
in a foreign currency may be designated as a hedge of the foreign
currency exposure of an unrecognized firm<br>
commitment denominated in a foreign currency or a net investment in a
foreign operation.<br>
This Statement amends FASB Statement No. 52,
</font><font face="Arial, Helvetica" size=1><i>Foreign Currency
Translation, </i></font><font face="Arial, Helvetica" size=1>to permit
special accounting<br>
for a hedge of a foreign currency forecasted transaction with a
derivative. It supersedes FASB Statements<br>
No. 80, </font><font face="Arial, Helvetica" size=1><i>Accounting for
Futures Contracts, </i></font><font face="Arial, Helvetica" size=1>No.
105, </font><font face="Arial, Helvetica" size=1><i>Disclosure of
Information about Financial Instruments<br>
with Off-Balance-Sheet Risk and Financial Instruments with Concentrations
of Credit Risk, </i></font><font face="Arial, Helvetica" size=1>and No.
119, </font><font face="Arial, Helvetica" size=1><i>Disclosure<br>
about Derivative Financial Instruments and Fair Value of Financial
Instruments. </i></font><font face="Arial, Helvetica" size=1>It amends
FASB<br>
Statement No. 107,
</font><font face="Arial, Helvetica" size=1><i>Disclosures about Fair
Value of Financial Instruments,
</i></font><font face="Arial, Helvetica" size=1>to include in Statement
107 the<br>
disclosure provisions about concentrations of credit risk from Statement
105. This Statement also nullifies or<br>
modifies the consensuses reached in a number of issues addressed by the
Emerging Issues Task Force.<br>
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application<br>
of this Statement should be as of the beginning of an entity’s fiscal
quarter; on that date, hedging relationships<br>
must be designated anew and documented pursuant to the provisions of this
Statement. Earlier application<br>
of all of the provisions of this Statement is encouraged, but it is
permitted only as of the beginning of<br>
any fiscal quarter that begins after issuance of this Statement. This
Statement should not be applied retroactively<br>
to financial statements of prior
periods.</font><font face="Arial, Helvetica"></font></blockquote></body>
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