Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 26. DERIVATIVES AND HEDGE ACCOUNTING

Robert L. Royall II, CPA, CFA, MBA

Ernst & Young LLP

Francine Mellors, CPA

Ernst & Young LLP

The editors wish to acknowledge the previous contributions to this chapter by Norman Strauss, CPA, of the Stan Ross Department of Accountancy, Zicklen School of Business.

INTRODUCTION

In January 1992, the Financial Accounting Standards Board (FASB) began deliberating issues related to derivatives and hedging transactions. After much controversy, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. It was discussed at over 100 FASB meetings, was exposed for comments twice, and was the subject of two different congressional hearings. Legislation had even been proposed in an attempt to override the Statement.

Statement No. 133 was effective for financial statements for fiscal years beginning after June 15, 2000, and calendar-year companies were required to apply the new standard on January 1, 2001. The transition adjustments resulting from adoption were required to be recognized in income and other comprehensive income (stockholders' equity), as appropriate, as a cumulative effect of an accounting change. The Statement superseded Statement No. 80, "Accounting for Futures Contracts," Statement No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and Statement No. 119, "Disclosures about Derivative ...