Some Derivatives Accountsing Issues

Accounting standards for derivatives activity are undergoing rapid revision, both in the US. and internationally. Hedge accounting, a special treatment to allow ofsetting profits and losses on dgerent components o f a hedge to be reflected in earnings at the same time, is becoming less useful with the increased reporting of marked-to-market valuations. This process is being accelerated by the newly adopted Financial Accounting Standard 119, which calls for a substantial increase in the disclosure o f derivatives-related information by US. . corporations. We argue, however, that release of much derivatives information, such as notional princ+al values, numbers and maturities o f contracts in dgerent markets, and so on, can easily be misleading, and may not aid public understanding ofthe true risksfacing a j r m . In some cases, it may even be damaging to the shareholders' interests. The rush to implement new accounting standards in this instance carries the risk o f requiring inappropriate disclosure forjrms using derivatives.