Accounting for Derivatives and Corporate Risk Management Policies

57 Pages Posted: 23 Jan 2002

See all articles by Ronnie Barnes

Ronnie Barnes

London Business School - Department of Accounting

Date Written: December 2001

Abstract

In this paper, I discuss the issue of how non-financial corporations should report the results of their use of derivative financial instruments. Using the recently issued SFAS 133 as a framework, I introduce three possible accounting regimes (mark to market, mark to market hedge and deferral hedge) and characterize the information provided to users of financial statements under each of the three alternatives. I then present a simple economic model with which to analyze the effect (if any) on corporate risk management policies of the different regimes. My main result is that hedging distortions (defined as deviations from the optimal hedge position in the absence of any accounting considerations) may occur in a mark to market regime but not in a mark to market hedge or deferral hedge regime. Finally, I discuss the policy implications of this result and explain how the ability to make voluntary disclosures may eliminate these distortions - this conclusion is, however, valid only if the underlying risk exposures of firms are ex-post verifiable.

Keywords: Corporate risk management; Hedging; Accounting for derivatives; Fair value accounting

JEL Classification: M41, M44, M45

Suggested Citation

Barnes, Ronnie, Accounting for Derivatives and Corporate Risk Management Policies (December 2001). London Business School Accounting Subject Area No. 018. Available at SSRN: https://ssrn.com/abstract=298021 or http://dx.doi.org/10.2139/ssrn.298021

Ronnie Barnes (Contact Author)

London Business School - Department of Accounting ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
44 (0)20 7262 5050 (Phone)
44 (0)20 7724 6573 (Fax)

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