Determinants and Consequences of Firms’ Derivative Accounting Decisions

Journal of Financial Reporting, Forthcoming

60 Pages Posted: 4 Nov 2015 Last revised: 16 Apr 2020

See all articles by Spencer Pierce

Spencer Pierce

Florida State University - College of Business

Date Written: April 15, 2020


Financial accounting standards require derivatives to be recognized at fair value with changes in value recognized immediately in earnings. However, if specified criteria are met, firms may use an alternative accounting treatment, hedge accounting, which is intended to better represent the underlying economics of firms’ derivative use. Using FAS 161 disclosures, I examine determinants of hedge accounting use and the effects of hedge accounting on financial reporting and capital markets. I find variation in firms’ hedge accounting use and provide evidence that compliance costs of applying hedge accounting affect firms’ decision to use hedge accounting. Firms decrease their reported earnings volatility via derivatives that receive hedge accounting and could further decrease their earnings volatility if hedge accounting were applied to all their derivatives. Inconsistent with arguments given for using hedge accounting, I fail to find a decrease in investors’ assessment of firm risk from using hedge accounting.

Keywords: derivatives, hedge accounting, risk, earnings volatility, FAS 161

JEL Classification: M40, M41, G32

Suggested Citation

Pierce, Spencer, Determinants and Consequences of Firms’ Derivative Accounting Decisions (April 15, 2020). Journal of Financial Reporting, Forthcoming, Available at SSRN: or

Spencer Pierce (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

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