H3: Firms whose insiders use
derivative instruments are likely to see an increase in investment (i.e., R&D, capital expenditures, and advertising expenditures) and firm risk (i.e., stock return volatility and cash flow volatility) following the use of a
derivative instrument.
As a rule,
derivative instruments are reported at fair value in the financial statements.
"The successful refinancing with Barclays Bank is clear evidence of the confidence that financial institutions now have in Welsh rugby and I am particularly pleased that we have rid ourselves of the old
derivative instruments which have burdened us for some time and were becoming increasingly problematic.
If the hedge fund is engaged in complicated risk strategies, including use of
derivative instruments in which the risks are embedded in the instruments themselves and not as easy to ascertain, and including situations in which counterparties arc not well known, it may be very difficult for a regulator to know what to do.
This Statement changes the disclosure requirements for
derivative instruments and hedging activities.
The scope of the new SEC rules is broader than FAS 119, expanding disclosure requirements beyond the boundary of financial
derivative instruments. The SEC issuance states that market risk is inherent in derivative and nonderivative instruments, including:
Statement of Financial Accounting Standards (SFAS) 133, Accounting for
Derivative Instruments and Hedging Activities, explains more about derivative underlyings in Appendix C:
GASB has issued Guide to Implementation of Statement 53 on
Derivative Instruments, available at www.calcpa.org/53, to assist with the implementation of its recently issued standard on accounting and financial reporting for
derivative instruments.
* The consistent critical terms method compares the terms of the
derivative instrument with the terms of the hedgeable item to determine that they are either the same or essentially similar.
"
Derivative instruments are risk management or risk transfer tools.
When a
derivative instrument significantly reduces financial risk by substantially offsetting changes in the cash flows (a cash flow hedge) or fair value (a fair value hedge) of an associated item that is eligible to be hedged (a hedgeable item), the hedge is considered effective, and hedge accounting should be applied.
For example, if a derivative qualifies as a cash flow hedge, a company can report the effective portion of the gain or loss on the
derivative instrument as a component of other comprehensive income (loss), rather than on the income statement, and reclassify it into earnings in the same period or periods during which the hedged transaction affects earnings.