Accounting Disclosure About Derivative Financial Instruments

The use of derivative financial instruments by financial institutions, other companies, investment funds, and individuals has grown rapidly in recent years. By transacting in exchange-traded instruments (such as futures and options) and "over-the-counter vehicles" (such as swaps, forwards, and other customized instruments), market participants are able to transform their risk exposures in anticipation of movements in interest rates, (currency) exchange rates, indices of stock prices or groups of commodities, and the prices of numerous specific commodities. Derivatives, properly employed, enhance overall economic welfare by making these risk transformations feasible and cost-effective.

Unfortunately, current external reporting requirements for financial assets and liabilities and for derivatives are incomplete and inconsistent. These reporting requirements often induce firms not to hedge important… Read the entire statement.