U.S. GAAP and IFRS require firms to disclose the fair value of financial instruments in a note to the financial statements. What should such a note include?
DISCLOSURES RELATED TO DERIVATIVE INSTRUMENTS
U.S. GAAP and IFRS require firms to disclose the fair value of financial instruments in a note to the financial statements. U.S. GAAP also requires firms to disclose the following information (among others) with respect to derivatives (IFRS requires similar but not identical disclosures).
1 . A description of the firm's risk management strategy and how particular derivatives help accomplish the firm's hedging objectives. The description should distinguish among derivative instruments designated as fair value hedges, cash flow hedges, and all other derivatives. This disclosure helps the user of the financial statements to understand the types of risks that a firm faces and how it uses derivatives to hedge those risks.
2 . For fair value and cash flow hedges, firms must disclose the net gain or loss recognized in earnings resulting from the hedge's ineffectiveness (that is, not offsetting the risk hedged) and the line on the income statement that includes this net gain or loss. Without this required disclosure, firms might be reluctant to divulge that their hedging activities were ineffective and include the amount of any gain or loss from such ineffectiveness in an account with other revenues, gains, expenses, and losses.
3 . For cash flow hedges, firms must describe the transactions or events that will result in reclassifying gains and losses from accumulated other comprehensive income to net income and the estimated amount of such reclassifications during the next 12 months. Accumulated other comprehensive income includes unrealized gains and losses that will affect net income of future periods. Most derivatives do not give management discretion as to when these unrealized gains and losses will affect earnings, unlike marketable securities classified as available for sale where management has some discretion in timing earnings effects. This disclosure for derivatives requires firms to disclose their expectations as to the amount that the firm will transfer from accumulated other comprehensive income to net income within the next year to assist users of the financial statements forecast the next year's earnings.
4 . The net amount of gains and losses recognized in earnings because a hedged firm commitment no longer qualifies as a fair value hedge or a hedged forecasted transaction no longer qualifies as a cash flow hedge. A firm might use a derivative to hedge an unrecognized commitment or forecasted transaction. If events unfold so that the firm does not need to fulfill its commitment or engage in the forecasted transaction, any unrealized gains and losses on derivatives related to those commitments and forecasted transactions affect net income. Standard setters were perhaps concerned that firms would acquire a particular derivative for speculation but designate it as hedging a commitment or forecasted transaction. This required disclosure alerts users of the financial statements of the gains and losses that result because the derivative no longer qualifies, if it ever did, as a fair value or cash flow hedge.
You might also like to view...
The journal entry used to record the issuance of a discounted note for the purpose of borrowing funds for thebusiness is
a. debit Cash and Interest Expense; credit Notes Payable b. debit Cash and Interest Payable; credit Notes Payable c. debit Accounts Payable; credit Notes Payable d. debit Notes Payable; credit Cash
There ________ some men waiting for help, but the reason for their difficulties ________ unclear
A) is/seems B) is/seem C) are/seems D) are/seem
If a partner's capital balance is a debit after it has absorbed its share of the loss on realization, the balance is referred to as a deficiency
Indicate whether the statement is true or false
Stella is fifteen. In most states, for contractual purposes, Stella would be considered a minor until she is A) sixteen
B) eighteen. C) seventeen. D) ?twenty-one.