Overall Case Objectives and Content
This set of cases and explanatory material covers the main concepts
in Statement of
Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133). It is
addressed to accountants and financial analysts who are not financial
instruments experts, but who desire to learn at least the basics of
the economic underpinnings of, and the accounting for,
this increasingly important sphere of economic activity. The basic
materials include (1) a brief summary of most of the principle
requirements of SFAS 133; (2) a primer on the economics of derivatives,
their use as economic hedges, and journal entries illustrating the new
accounting treatments; and (3) five cases, each with several
alternative scenarios, that provide the opportunity to apply the
concepts presented in the summary of SFAS 133 and the primer. Also
available are four spreadsheet templates that can be used to
determine numerical values for use in the journal entries; printouts
of these spreadsheets are also included with the corresponding cases
so the cases can be completed without access to a computer. Finally,
Powerpoint slides are provided for use during discussions of
the cases. The slides cover important points to stress during
presentation of each case, as well as some solution journal entries.
The cases illustrate accounting for the four main types of
derivatives (swaps, forwards, futures, and options). They also
illustrate three out of the four accounting treatments allowed for
derivatives under SFAS 133, depending on hedging relationship: no
hedging relationship, a fair value hedge, or a cash flow hedge. Not
illustrated is the accounting for a hedge of a net investment in a
foreign operation. The cases also illustrate the four market risk
categories most frequently hedged using derivative instruments
(interest rate, foreign exchange rate, commodity price, and equity
price risks).