Accounting for Derivatives: An Update

In August of this year, the FASB released an amendment to the derivatives accounting rules setting out changes that should, for the most part, help address some of the distinctive problems that existed in the original rules. The changes are summarized by Ira Kawaller here: Watch the video

The primary change deals with Risk Component hedging. The change allows firms to use any interest rate specified contractually to be used in the cash flow hedge accounting, as opposed to only benchmark rates. Other changes deal with commodity price exposures and hedge effectiveness assessments. These changes simplify a somewhat complex set of accounting standards. Caution is advised when dealing with these critical, complex transactions.