FAS 161 Requires Additional Disclosures for Derivative and Hedging Activities
|FASB: Financial Accounting Standards Board
|FAS 161: Financial Accounting Standard, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133
|FAS 133: Financial Accounting Standard, Accounting for Derivative Instruments and Hedging Activities
|OCI: other comprehensive income
FAS 161 improves the transparency of financial reporting by requiring enhanced disclosures that better convey the purpose of an entity’s derivative and hedging activities in terms of the risk it intends to manage.
This standard amends and expands the disclosure requirements of FASB Statement 133, and is effective for fiscal years and interim periods beginning after November 15, 2008. Early application is encouraged. For comparative presentations, disclosures related to prior years are encouraged, but not required.
Organizations affected by FAS 161
With the same scope as FAS 133, FAS 161 applies to all entities, including nonprofit organizations.
FAS 161 to answer common questions
Since the issuance of FASB Statement 133 in 1998, the use and complexity of derivative instruments and hedging activities has increased significantly. Constituents have expressed the need for more information about derivative instruments and hedging activities and how they affect an entity’s financial position, financial performance, and cash flows. The expanded disclosure requirements address the following:
- How and why does an entity use derivative instruments?
- What are the risks related to using them?
- What is the effect on financial statements?
The additional disclosures required by FAS 161 are summarized below:
- Entities must provide information outlining the reasons for holding or issuing derivative instruments. Disclosures should be in the context of overall risk exposures.
- For derivatives used as hedges, the organization should provide a description of those designated as a) fair value hedges, b) cash flow hedges, and c) foreign currency hedges. In addition, for derivatives held solely as investments, the entity needs to provide the purpose for holding such an investment.
- Qualitative information about the entity’s objectives and strategies for using derivative instruments should be made in the context of the entity’s overall risk exposures relating to interest risk, foreign currency exchange rate risk, commodity price risk, credit risk, and equity price risk. If made, those disclosures should include a discussion of those exposures even though the entity does not manage some or all the risks through the use of these derivatives.
- For each reporting period in which a statement of financial position is presented, the following should be disclosed in tabular form by type of derivative contract:
- The location and fair value amounts of derivative instruments reported in the statement of financial position
- The location and amount of gains and losses reported in the statement of operations. Gains and losses should be presented separately for:
- Derivative instruments designated as fair value hedges
- The effective portion of gains and losses on cash flow hedges and net investment hedges recognized in OCI
- The effective portion of gains and losses on cash flow hedges and net investment hedges reclassified out of OCI and into earnings
- The portion of gains and losses for cash flow hedges and net investment hedges representing a) the amount of the hedges’ ineffectiveness and b) the amount excluded from the assessment of hedge effectiveness
- Derivatives not designated as hedges
- For each reporting period for which a statement of financial position is presented, the following should be disclosed:
- The existence and nature of credit-risk-related contingent features and circumstances that could be triggered in instruments that are in a net liability position
- The aggregate fair value of such derivatives
- The aggregate value of assets that are already reported as collateral at the end of the reporting period
- The aggregate fair value of additional assets that would be reported as collateral
- The aggregate fair value of assets needed to settle the instrument immediately if credit-risk-related contingent features were triggered
Nonprofit organizations within the scope of the AICPA Audit and Accounting Guide, Health Care Organizations, should also present the disclosures in tabular form. These organizations should refer to amounts within the performance indicator, instead of net income, and amounts outside the performance indicator, instead of OCI.
For additional information, contact us or read the new standard.