If we don’t destroy ourselves first, we will someday discover intelligent life on another planet. But when we do, the chances are about one in a billion that we’ll find hedge accounting standards more complex than our own.
Now would also be as good a time as any to peel the onion on hedge accounting since the FASB has recently reached a consensus on a revisions to rules that have been in place since the issuance of SFAS 133 in 1998.
At the risk of oversimplifying, the FASB addressed three problems in SFAS 133:
First, there was the problem of accounting for derivatives, which without additional guidance would be measured at historic cost. Historic cost accounting is always suboptimal, but it is especially problematic when it comes to derivatives. Consider, for example, a financial institution with $9 billion in liabilities covered by $10 billion of assets. Next, assume that said financial [Read More...]