A Case-based Introduction to Bank Accounting for Derivatives

9 Pages Posted: 24 Mar 2014 Last revised: 20 Mar 2015

See all articles by Dov Fischer

Dov Fischer

CUNY Brooklyn College

Michael M. Grayson

Texas A&M University - Kingsville; CUNY Brooklyn College

Date Written: March 23, 2014

Abstract

This short case introduces accounting and finance students and practitioners to bank accounting for derivatives using Goldman Sachs 2013 financial statements as an illustrative case. The technical knowledge assumed is very basic. We begin with the basic accounting equation of assets = liabilities plus equity, or alternatively assets – liabilities = equity. We then proceed to find derivative assets and liabilities on the balance sheet (we need to do some digging to find the balance-sheet accounts containing them). We then proceed to discover that the actual fair values of derivatives assets and liabilities are much larger than those included in the balance sheet. Furthermore, the vast majority of these “fair values” are somewhat subjective Level 2 values. We conclude by examining another source of unrecognized liabilities representing potential payouts from credit derivatives. We summarize by showing the off-balance sheet derivative assets represent 88% of total assets, while off-balance sheet derivative liabilities represent 103% of reported total liabilities.

Keywords: Bank Accounting, Derivatives, Credit Derivatives, Level 2, Fair Values, Maximum Notional Payouts, London Whale

JEL Classification: A22, A23, G20, M41

Suggested Citation

Fischer, Dov and Grayson, Michael M. and Grayson, Michael M., A Case-based Introduction to Bank Accounting for Derivatives (March 23, 2014). Available at SSRN: https://ssrn.com/abstract=2413096 or http://dx.doi.org/10.2139/ssrn.2413096

Dov Fischer (Contact Author)

CUNY Brooklyn College ( email )

Brooklyn, NY NY - New York 11210
United States

Michael M. Grayson

Texas A&M University - Kingsville ( email )

700 University Boulevard
Kingsville, TX 78363
United States

CUNY Brooklyn College ( email )

2900 Bedford Avenue
Brooklyn, NY 11210
United States

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