Statement 133 provides guidance for accounting for derivatives and hedging securities. The statement has created some implementation errors when financial statements are adjusted to comply with it. It has been argued that the statement needs to be revised for two main reasons, because it lacks proper disclosure and has not created adequate transparency for financial statements. FASB has been actively discussing changes to FAS 133 to correct these errors and to create a better understanding of why derivatives are sued, how they are accounted for, and how these methods of accounting affect the overall financial position of the company involved. This paper will discuss the original concepts and provisions from FAS 133, how these concepts were created, the detrimental consequences when the statement was adopted, and finally how FASB is amending FAS 133 to fix these problems.
Currently a derivative instrument is a three part definition where all parts must be present. The first is that the instrument has one or more underlyings, notional amounts or payments provisions. An underlying is defined by FAS 133 as a “specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable.” This refers to the rate involved and not the actual instrument in question. Notional amount refers to the physical amount of currency or product that is determined by the contract. The combination of notional amounts and the underlying will show the amount of the settlement if the settlement is indeed required. The last term used in the definition, payment provisions, is used to show a specific settlement given that the underlying acts in a certain manner.
The second characteristic of a derivative instrumen ...