Wiley GAAP 2008

Perspective and Issues

Reporting entities have an unprecedented variety of financial products available to them to meet their short‐term (and long‐term) investing and risk management goals. These products have differing characteristics and present the investor with a wide range of returns and, of course, a wider range of risks. Many of these are useful as hedging tools, as well.

GAAP has evolved slowly, deliberately, and sometimes reactively to the emergence of new financial vehicles and their increasing complexity. Initial efforts in this regard focused primarily on informing financial statement readers about the risks and uncertainties inherent in these investments. This was achieved by providing disclosures that accompanied financial statements, but that did not formally recognize the investments as assets or liabilities, and also did not recognize their inherent volatility in the income statement. This approach thus did not fully provide the needed transparency and proved an inadequate substitute for full financial statement recognition.

FAS 133, Accounting for Derivative Instruments and Hedging Activities, governs the accounting for derivatives. Scores of interpretations have since been issued by a special implementation guidance task force (the Derivatives Implementation Group or DIG) established by FASB. Derivatives literature is exceedingly complex, which is largely a consequence of the rules establishing “special accounting” for hedging. Limited accounting relief (i.e., ...