Accounting Principles Of Derivative Instruments

There are certain accounting principles of derivative instruments, which are taken care of by the FAS 133 or the Financial Accounting Standards Board Statement No.133. The article below highlights certain facts pertaining to the same.
The FAS 133 takes into account hedging activities in addition to the accounting methods of derivative instruments also. Derivative instruments are financial instruments or financial contracts, which have their values derived from values pertaining to underlying assets, also known as underliers. It may also be an underlying index.

These may include:
Debt instruments
Interest rates
Exchange rates

FAS or Financial Accounting Standards:
The FAS 133 or Financial Accounting Standards Board Statement No. 133 has been formulated for the accounting of hedging activities as well as derivative instruments. FAS 133 set reporting standards for accounting of derivative instruments. The derivative instruments also include few derivative instruments, which remain “embedded in other contracts”. They are referred to as embedded derivatives.

The following concepts make up the accounting principles of derivative instruments:

Balance sheet:

All derivatives should be recognized as either liabilities or assets by the entities in the financial position statement. The derivative instruments are to be measured at fair value.

Income statement:

The designation pertaining to the derivative instruments impact the income statement. A derivative instrument is not designated unless few requirements are fulfilled.

Designation of derivatives may be as under:
Fair Value Hedge
Foreign Currency Hedge
Cash Flow Hedge

Scope of the accounting principles of derivative instruments:

The Financial Accounting Standards Board Statement No.133 or FAS 133 accounting principles of derivative instruments is applicable to all financial institutions. There are certain non-profit organizations as well as certain pension benefit programs, which ought to consider alterations in fair value as change pertaining to net assets during a “period of change”. This is true for all derivatives.

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Last Updated on : 1st August 2013

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