Description
Voluntary disclosure in accounting is the provision of information by a company's management beyond requirements such as generally accepted accounting principles and Securities and Exchange Commission rules
The Enlightenment from FAS161 on Accounting Disclosures about Financial Swaps of Chinese Listed Commercial Banks
CHEN Hongming, GONG Hao School of Economic and Management, Changsha University of Science and Technology, China, 410114 [email protected] Abstract: As the accounting disclosures about derivative instruments becoming the focus of attention under financial crisis, the Financial Accounting Standards Board has issued Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities. Through analyzing the present situations and existing problems of the accounting disclosures about financial swaps, which is under the guidance of the new accounting standards in China, in 2008 annual reports of listed commercial banks, this paper suggests some relevant improvement, which based on the actual situation of the disclosure about financial swaps in China, and combined with the relevant requirements of the Financial Accounting Standard No. 161. Keywords: Financial swaps, Accounting Disclosure, Financial Accounting Standard No. 161
1 Introduction
In recent years, financial swaps, as a derivative instrument which is with the nature of diversity and flexibility, was given a rapid development in Chinese listed commercial banks. In 2008, Li Xiaohua conducted a preliminary study on accounting disclosures about financial swaps in his PhD thesis, and he suggested that “corresponding value is recorded in the accounts when the interest rate swap contract is signed and using discounted cash flow method to calculate fair value”. However, at home and abroad the study on accounting disclosures about financial swaps was quite scarce. The collapse of the U.S. subprime mortgage market sparked the concern of derivative financial instruments. In the international accounting profession, the Financial Accounting Standards Board which has always been a leading position in respect of research and formulating the accounting standard of derivation financial instruments, has issued Financial Accounting Standard No.161, Disclosures about Derivative Instruments and Hedging Activities (Hereafter referred to as FAS161 , in March, 2008. This new statement amends Financial Accounting Standard No.133, Accounting for Derivative Instruments and Hedging Activities. The intent of FAS161 is to enhance these disclosures and thereby improve the transparency of financial reporting. Enhancing the disclosure requirements, makes investors have a better understanding of derivatives’ effects on the company's financial position, financial performance, and cash flows. FAS161 is instructive to disclosures about derivative instruments of listed commercial banks in China. In this paper, the author takes financial swaps as an example, to discuss the enlightenment from FAS161 on accounting disclosure.
?
2 Current Situation and Existing Problems
In the listed companies who used derivative financial instruments, commercial banks accounted for about 76.5%, which was shown in annual reports of listed companies in 2008. In China, there are 13 of 14 commercial banks which are A-share listed companies, using derivative financial instruments, and all of them involving financial swaps business. The interest rate swap, which 13 banks have used, is the main type of the involving financial swaps. However, currency swaps, equity swaps, precious swap and credit default swaps, are also involved in. After the implementation of new accounting standards in 2007, the time of recognition and measurement attributes of financial swaps have been harmonized. It is recognized on the day when contract has been signed on, and it is measured at fair value. In 2007, the financial swaps, as a part of derivative financial instruments, were listed in the balance sheet in the name of derivative financial assets or derivative financial liabilities, excepting that derivative financial instruments of China
510
Merchants Bank were disclosed in the notes of financial statements as secondary subject of the financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period. Except to be presented in the table of financial statements, the accounting information of financial swaps is usually disclosed in the notes of statements. Through comparing and analyzing the notes of statements of the 13 listed commercial banks, the author finds that the disclosures about financial swaps of 13 banks were quite different. Following is a description on several major aspects. 2.1 The disclosure of objectives for using financial swaps Firstly, the disclosure of objectives for using financial swaps is simplistic, and even been neglected. The majority of banks, such as Bank of Ningbo, Huaxia Bank, China Merchants Bank, simply described the objectives for using derivative financial instruments in few words, like " to transfer the interest rate risk and exchange rate risk of the bank effectively", "using for assets and liabilities management", etc., and did not specify the objectives for using financial swaps. Moreover, the Bank of Communications and Shenzhen Development Bank even had not disclosed the objectives for using derivative financial instruments. Only Pudong Development Bank, Industrial Bank, Industrial and Commercial Bank of China specified the objectives for using financial swaps. Industrial and Commercial Bank of China distinguished financial swaps between those designated as hedging instruments and those designated as trading instruments; further, derivative instruments designated as hedging instruments, were distinguished between derivative instruments designated as fair value hedging instruments and derivative instruments designated as cash flow hedging instruments. The accounting methods will be different according to the different objectives for using the financial swap. Therefore, only a detailed disclosure of objectives for using various types of financial swaps could help report users give reasonable judgments on whether the accounting treatments of financial swaps are appropriate. Secondly, objectives for using financial swaps and other derivative financial instruments are disclosed in different parts of the notes. Some are in the part of the interpretation of accounting policy and accounting estimates, and some are in the part of the project notes of derivative financial instruments, and the rest are in the part of risk management. The difference of locations of disclosure brings report users inconvenience for reading, and inappropriate locations of disclosure are not conducive to report users to understand objectives for using financial swaps combined with its risk. 2.2 The disclosure of the relevant information of financial swaps’ fair value Firstly, it is hard to specify the disclosure of the fair value of financial swaps because of the different ways derivative financial instruments are classified. Since the implementation of new accounting standards, the bank disclosed more information on the nominal amount and fair value, however, due to the classification, the information can not be implemented in specific financial swaps, thereby concealing the risks of financial swaps, and being not conducive to the users to make correct decision. According to basic tools categories, the Industrial Bank, Bank of Communications, China Construction Bank, CITIC Bank divided derivative financial instruments into interest rate derivatives, currency derivatives, equity derivatives, and precious metals derivatives to disclose their fair value; while the Industrial and Commercial Bank of China, Bank of China combined some derivative financial instruments to reflect the whole fair value, for example, the Industrial and Commercial Bank of China mergers foreign exchange forward contracts and foreign exchange swap contracts as a project. Both methods can not reflect the nominal amount and the fair value of specific financial swaps, which is not conducive to report users to access relevant information. Secondly, the disclosure of the method to obtain fair value is too rough and abstract. Banks did not disclose specifically the method to obtain and the valuation to calculate the fair value of financial swaps. The use of valuation model, the assumption and how to valuate are not explained or disclosed, which makes it hard for information users to get an intuitive concept about how the bank obtained the fair value. Using valuation techniques to get the fair value should be subject to model selection and inherent assumptions, and different valuation techniques may result in different fair value, resulting different amount of the assets and liabilities of financial swaps. Further, the descriptions about the methods to
511
obtain the fair value banks make, can not provide users the understandable information, which makes the users doubt about the relevance and the reliability of the information banks provided, and it also leaves room for banks’ non-transparent operation. 2.3 Disclosure of the risk of financial swaps Seeing from the current situation of the disclosure of the risk of financial swaps, most of the banks looks have disclosed relevant contents, however, the contents lack of validity and relevance and the disclosure need to be enhanced. For example, Huaxia Bank and China Merchants Bank did not involve the contents of derivative financial instruments in the disclosure of credit risk. For another example, the majority of banks such as Shenzhen Development Bank, Bank of Ningbo, Industrial Bank, Industrial and Commercial Bank of China, only disclosed the Maximum credit risk exposure of derivative financial instruments, but not refined to financial swaps. And when it comes to the Shanghai Pudong Development Bank, China Minsheng Bank, Bank of Communications, they get descriptive information of credit risk of derivative financial instruments, but did not specifically related to financial swaps as well. The most important thing of disclosure about financial swaps is to reveal the information of risk. To take into account of the trend of fluctuation of market exchange rates and market interest rates, report users with the information of risk modeling can forecast the risk of financial swaps which is most relevant and important to decision-makers. As far as Chinese current situation of disclosure of the financial swaps risk, there is still much room for improvement.
?
3 The Enlightenment from FAS161 and the Author’s Proposal
The objective of FAS161 is to enhance the report users’ understanding on three aspects: objectives and strategies for using derivatives, the accounting treatment of derivative instruments, and the effect of derivative instruments affecting an entity’s financial position, financial performance, and cash flows. SFAS 161 accomplishes the three objectives listed above by requiring the following disclosures: • Qualitative disclosures regarding the objectives and strategies for using derivative instruments within the context of a firm's overall risk exposure. • Quantitative disclosures in tabular format of the fair values of derivative instruments and associated gains or losses. • Disclosures about credit-risk-related contingent features in derivative instruments. Based on the Chinese actual situation of the disclosure about financial swaps, and combined with the relevant requirements of FAS161, the author gives some recommendations on improving the disclosure about financial swaps. 3.1 Enhancing the disclosure of objectives and strategies for using financial swaps. Objectives for using financial swaps are the basis for report users to judge whether the accounting information of financial swaps is correct and comprehensive. Furthermore they are closely bound up with the risk of financial swaps. Therefore, to every financial swaps business holding on the report day, a detailed description of the holding purposes which is hedging or speculation, is needed. Derivative financial instruments distinguished between those used for hedging and those used for speculation, should be disclosed different information separately. Objectives for using financial swaps should be disclosed in the context of risk management in notes of financial statements. FAS161 points out that: “It may be more meaningful if such objectives and strategies are described in the context of an entity’s overall risk exposures relating to interest rate risk, foreign currency exchange rate risk, commodity price risk, credit risk, and equity price risk”. Therefore, the author considers that it is better to transfer information, that why and how to use financial swaps for risk management, to statement users, to disclose objectives for using financial swaps in the context of risk management. For example, currency swaps and interest rate swaps also contain interest rate risk, exchange rate risk, credit risk and settlement risk, so, the relevant information of financial swaps, including types, features, dates, holding purpose, etc. can be fully disclosed, in the place where the
512
interest rate risk, exchange rate risk and other risk are disclosed, in the context of risk management. 3.2 Unifying classification methods and disclosing the methods of obtaining fair value As a result of different classification methods, there is a varying extent on the disclosure about financial swaps’ notional amounts and fair value in each bank. FAS161 pointed out that, the disclosure of the fair value of derivative financial instruments should be distinguished between hedging instruments and non-hedging instruments, and these two categories should be disclosed on the classification of derivative financial instruments, like: interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts and so on. The author holds that, for a scientific and comprehensive disclosure, we should take requirement of FAS161 firstly which is described above. Then, according to trading methods and characteristics, each category should be divided into financial forward contracts, financial futures, financial options, and financial swaps. This classification method could comprehensively reflect specific information of all sorts of financial instruments, and it is also conducive to clearly reflect the information of fair value of financial swaps, which meet the qualitative requirements of accounting information. Improve the disclosure of methods of obtaining fair value. Currently the methods of estimating fair value using by banks are market value method, matrix pricing model, the traditional present value method, the expected cash flow method, option pricing models, option-adjusted extended model and the basic analysis. Because there is no well-developed financial swaps market, the fair value of financial swaps could not be determined by market price. But no matter what method is used, the relevant information of fair value, such as the source, the measurement model range of model parameters and frequency of revision, should all be disclosed.
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3.3 Enhance disclosures about credit-risk-related contingent features in derivative agreements. It is known that derivative instruments often contain contingent features that could result in an immediate payment to counterparty on an agreement that is in a liability position. A material adverse change clause could provide the counterparty with the right to terminate the derivative agreement before maturity if specific events occur, such as a downgrade of the entity’s credit rating below investment grade. Contingent features within derivative instruments also may contain provisions that could result in a requirement to post additional collateral in instances in which the contingent feature is triggered. Therefore, in disclosure of credit risk of financial swaps, the following disclosures about contingent features be required: disclosure of the existence and nature of contingent features in derivative instruments, the aggregate fair value amount of derivative instruments that contain those features, and the aggregate fair value amount of assets that would be required to be posted as collateral or transferred under the provisions about the triggering of the contingent features. On the one hand, the risk of financial swaps, which is reflected by the quantitative information in the balance sheet and income statement, can be judged by reports users, according to fluctuations of the quantitative information; on the other, the risk of financial swaps can be explained or calculated directly with the changes of interest rates and exchange rates. The author considers that, to provide a more visually risk information, quantifying the risks of financial swaps should be penetrated deeply in China. For example, disclosure of VAR (value at risk) information, disclosure of K-line graph of the value of VAR etc. Meanwhile, the descriptive information of financial swaps risk should be further concretized in report notes, and the relevant hedging measures should be disclosed.
4 Conclusion
In China, financial swaps and other derivative financial instruments are in increasingly widespread application, and their accounting recognition, measurement and so on, which are still the cutting-edge issues in the international accounting profession, are developing and perfecting. Before they are well developed we will inevitably face some difficulties. When the financial swaps and other derivative financial instruments could not be comprehensively, clearly and reliably expressed in financial statements, report users could still make right decisions if there are full and proper disclosures in the
513
notes, so as to minimize the negative impact of immature standards. At present, as china is improving the accounting standards of derivative financial instruments with Chinese characteristics, we should draw on the advanced accounting standards of disclosures about derivative financial instruments from other countries, to develop disclosures about derivative financial instruments in China.
References
[1]. FASB Statement No.161: Disclosures about Derivative Instruments and Hedging Activities. [2]. Barbara Apostolou and Nicholas G. Apostolou. Derivatives: New Disclosures Required [J]. Accounting & Auditing, 2008, (11): 28~36. [3]. Ministry of Finance. P.R.China. Accounting Standards for Business Enterprises (2006) [M]. Beijing: Economic Science Press, 2006(in Chinese) [4]. Li Xiaohua. The Study of Accounting Information Disclosure of Financial Swaps [D]. North China University of Technology, 2008(in Chinese) [5]. Wang Dongjun. Innovative Approaches of Accounting Disclosures about Derivative Instruments [J]. Research of Financial and Accounting, 2007, (9): 17~18(in Chinese)
514
doc_362002450.pdf
Voluntary disclosure in accounting is the provision of information by a company's management beyond requirements such as generally accepted accounting principles and Securities and Exchange Commission rules
The Enlightenment from FAS161 on Accounting Disclosures about Financial Swaps of Chinese Listed Commercial Banks
CHEN Hongming, GONG Hao School of Economic and Management, Changsha University of Science and Technology, China, 410114 [email protected] Abstract: As the accounting disclosures about derivative instruments becoming the focus of attention under financial crisis, the Financial Accounting Standards Board has issued Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities. Through analyzing the present situations and existing problems of the accounting disclosures about financial swaps, which is under the guidance of the new accounting standards in China, in 2008 annual reports of listed commercial banks, this paper suggests some relevant improvement, which based on the actual situation of the disclosure about financial swaps in China, and combined with the relevant requirements of the Financial Accounting Standard No. 161. Keywords: Financial swaps, Accounting Disclosure, Financial Accounting Standard No. 161
1 Introduction
In recent years, financial swaps, as a derivative instrument which is with the nature of diversity and flexibility, was given a rapid development in Chinese listed commercial banks. In 2008, Li Xiaohua conducted a preliminary study on accounting disclosures about financial swaps in his PhD thesis, and he suggested that “corresponding value is recorded in the accounts when the interest rate swap contract is signed and using discounted cash flow method to calculate fair value”. However, at home and abroad the study on accounting disclosures about financial swaps was quite scarce. The collapse of the U.S. subprime mortgage market sparked the concern of derivative financial instruments. In the international accounting profession, the Financial Accounting Standards Board which has always been a leading position in respect of research and formulating the accounting standard of derivation financial instruments, has issued Financial Accounting Standard No.161, Disclosures about Derivative Instruments and Hedging Activities (Hereafter referred to as FAS161 , in March, 2008. This new statement amends Financial Accounting Standard No.133, Accounting for Derivative Instruments and Hedging Activities. The intent of FAS161 is to enhance these disclosures and thereby improve the transparency of financial reporting. Enhancing the disclosure requirements, makes investors have a better understanding of derivatives’ effects on the company's financial position, financial performance, and cash flows. FAS161 is instructive to disclosures about derivative instruments of listed commercial banks in China. In this paper, the author takes financial swaps as an example, to discuss the enlightenment from FAS161 on accounting disclosure.
?
2 Current Situation and Existing Problems
In the listed companies who used derivative financial instruments, commercial banks accounted for about 76.5%, which was shown in annual reports of listed companies in 2008. In China, there are 13 of 14 commercial banks which are A-share listed companies, using derivative financial instruments, and all of them involving financial swaps business. The interest rate swap, which 13 banks have used, is the main type of the involving financial swaps. However, currency swaps, equity swaps, precious swap and credit default swaps, are also involved in. After the implementation of new accounting standards in 2007, the time of recognition and measurement attributes of financial swaps have been harmonized. It is recognized on the day when contract has been signed on, and it is measured at fair value. In 2007, the financial swaps, as a part of derivative financial instruments, were listed in the balance sheet in the name of derivative financial assets or derivative financial liabilities, excepting that derivative financial instruments of China
510
Merchants Bank were disclosed in the notes of financial statements as secondary subject of the financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period. Except to be presented in the table of financial statements, the accounting information of financial swaps is usually disclosed in the notes of statements. Through comparing and analyzing the notes of statements of the 13 listed commercial banks, the author finds that the disclosures about financial swaps of 13 banks were quite different. Following is a description on several major aspects. 2.1 The disclosure of objectives for using financial swaps Firstly, the disclosure of objectives for using financial swaps is simplistic, and even been neglected. The majority of banks, such as Bank of Ningbo, Huaxia Bank, China Merchants Bank, simply described the objectives for using derivative financial instruments in few words, like " to transfer the interest rate risk and exchange rate risk of the bank effectively", "using for assets and liabilities management", etc., and did not specify the objectives for using financial swaps. Moreover, the Bank of Communications and Shenzhen Development Bank even had not disclosed the objectives for using derivative financial instruments. Only Pudong Development Bank, Industrial Bank, Industrial and Commercial Bank of China specified the objectives for using financial swaps. Industrial and Commercial Bank of China distinguished financial swaps between those designated as hedging instruments and those designated as trading instruments; further, derivative instruments designated as hedging instruments, were distinguished between derivative instruments designated as fair value hedging instruments and derivative instruments designated as cash flow hedging instruments. The accounting methods will be different according to the different objectives for using the financial swap. Therefore, only a detailed disclosure of objectives for using various types of financial swaps could help report users give reasonable judgments on whether the accounting treatments of financial swaps are appropriate. Secondly, objectives for using financial swaps and other derivative financial instruments are disclosed in different parts of the notes. Some are in the part of the interpretation of accounting policy and accounting estimates, and some are in the part of the project notes of derivative financial instruments, and the rest are in the part of risk management. The difference of locations of disclosure brings report users inconvenience for reading, and inappropriate locations of disclosure are not conducive to report users to understand objectives for using financial swaps combined with its risk. 2.2 The disclosure of the relevant information of financial swaps’ fair value Firstly, it is hard to specify the disclosure of the fair value of financial swaps because of the different ways derivative financial instruments are classified. Since the implementation of new accounting standards, the bank disclosed more information on the nominal amount and fair value, however, due to the classification, the information can not be implemented in specific financial swaps, thereby concealing the risks of financial swaps, and being not conducive to the users to make correct decision. According to basic tools categories, the Industrial Bank, Bank of Communications, China Construction Bank, CITIC Bank divided derivative financial instruments into interest rate derivatives, currency derivatives, equity derivatives, and precious metals derivatives to disclose their fair value; while the Industrial and Commercial Bank of China, Bank of China combined some derivative financial instruments to reflect the whole fair value, for example, the Industrial and Commercial Bank of China mergers foreign exchange forward contracts and foreign exchange swap contracts as a project. Both methods can not reflect the nominal amount and the fair value of specific financial swaps, which is not conducive to report users to access relevant information. Secondly, the disclosure of the method to obtain fair value is too rough and abstract. Banks did not disclose specifically the method to obtain and the valuation to calculate the fair value of financial swaps. The use of valuation model, the assumption and how to valuate are not explained or disclosed, which makes it hard for information users to get an intuitive concept about how the bank obtained the fair value. Using valuation techniques to get the fair value should be subject to model selection and inherent assumptions, and different valuation techniques may result in different fair value, resulting different amount of the assets and liabilities of financial swaps. Further, the descriptions about the methods to
511
obtain the fair value banks make, can not provide users the understandable information, which makes the users doubt about the relevance and the reliability of the information banks provided, and it also leaves room for banks’ non-transparent operation. 2.3 Disclosure of the risk of financial swaps Seeing from the current situation of the disclosure of the risk of financial swaps, most of the banks looks have disclosed relevant contents, however, the contents lack of validity and relevance and the disclosure need to be enhanced. For example, Huaxia Bank and China Merchants Bank did not involve the contents of derivative financial instruments in the disclosure of credit risk. For another example, the majority of banks such as Shenzhen Development Bank, Bank of Ningbo, Industrial Bank, Industrial and Commercial Bank of China, only disclosed the Maximum credit risk exposure of derivative financial instruments, but not refined to financial swaps. And when it comes to the Shanghai Pudong Development Bank, China Minsheng Bank, Bank of Communications, they get descriptive information of credit risk of derivative financial instruments, but did not specifically related to financial swaps as well. The most important thing of disclosure about financial swaps is to reveal the information of risk. To take into account of the trend of fluctuation of market exchange rates and market interest rates, report users with the information of risk modeling can forecast the risk of financial swaps which is most relevant and important to decision-makers. As far as Chinese current situation of disclosure of the financial swaps risk, there is still much room for improvement.
?
3 The Enlightenment from FAS161 and the Author’s Proposal
The objective of FAS161 is to enhance the report users’ understanding on three aspects: objectives and strategies for using derivatives, the accounting treatment of derivative instruments, and the effect of derivative instruments affecting an entity’s financial position, financial performance, and cash flows. SFAS 161 accomplishes the three objectives listed above by requiring the following disclosures: • Qualitative disclosures regarding the objectives and strategies for using derivative instruments within the context of a firm's overall risk exposure. • Quantitative disclosures in tabular format of the fair values of derivative instruments and associated gains or losses. • Disclosures about credit-risk-related contingent features in derivative instruments. Based on the Chinese actual situation of the disclosure about financial swaps, and combined with the relevant requirements of FAS161, the author gives some recommendations on improving the disclosure about financial swaps. 3.1 Enhancing the disclosure of objectives and strategies for using financial swaps. Objectives for using financial swaps are the basis for report users to judge whether the accounting information of financial swaps is correct and comprehensive. Furthermore they are closely bound up with the risk of financial swaps. Therefore, to every financial swaps business holding on the report day, a detailed description of the holding purposes which is hedging or speculation, is needed. Derivative financial instruments distinguished between those used for hedging and those used for speculation, should be disclosed different information separately. Objectives for using financial swaps should be disclosed in the context of risk management in notes of financial statements. FAS161 points out that: “It may be more meaningful if such objectives and strategies are described in the context of an entity’s overall risk exposures relating to interest rate risk, foreign currency exchange rate risk, commodity price risk, credit risk, and equity price risk”. Therefore, the author considers that it is better to transfer information, that why and how to use financial swaps for risk management, to statement users, to disclose objectives for using financial swaps in the context of risk management. For example, currency swaps and interest rate swaps also contain interest rate risk, exchange rate risk, credit risk and settlement risk, so, the relevant information of financial swaps, including types, features, dates, holding purpose, etc. can be fully disclosed, in the place where the
512
interest rate risk, exchange rate risk and other risk are disclosed, in the context of risk management. 3.2 Unifying classification methods and disclosing the methods of obtaining fair value As a result of different classification methods, there is a varying extent on the disclosure about financial swaps’ notional amounts and fair value in each bank. FAS161 pointed out that, the disclosure of the fair value of derivative financial instruments should be distinguished between hedging instruments and non-hedging instruments, and these two categories should be disclosed on the classification of derivative financial instruments, like: interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts and so on. The author holds that, for a scientific and comprehensive disclosure, we should take requirement of FAS161 firstly which is described above. Then, according to trading methods and characteristics, each category should be divided into financial forward contracts, financial futures, financial options, and financial swaps. This classification method could comprehensively reflect specific information of all sorts of financial instruments, and it is also conducive to clearly reflect the information of fair value of financial swaps, which meet the qualitative requirements of accounting information. Improve the disclosure of methods of obtaining fair value. Currently the methods of estimating fair value using by banks are market value method, matrix pricing model, the traditional present value method, the expected cash flow method, option pricing models, option-adjusted extended model and the basic analysis. Because there is no well-developed financial swaps market, the fair value of financial swaps could not be determined by market price. But no matter what method is used, the relevant information of fair value, such as the source, the measurement model range of model parameters and frequency of revision, should all be disclosed.
?
3.3 Enhance disclosures about credit-risk-related contingent features in derivative agreements. It is known that derivative instruments often contain contingent features that could result in an immediate payment to counterparty on an agreement that is in a liability position. A material adverse change clause could provide the counterparty with the right to terminate the derivative agreement before maturity if specific events occur, such as a downgrade of the entity’s credit rating below investment grade. Contingent features within derivative instruments also may contain provisions that could result in a requirement to post additional collateral in instances in which the contingent feature is triggered. Therefore, in disclosure of credit risk of financial swaps, the following disclosures about contingent features be required: disclosure of the existence and nature of contingent features in derivative instruments, the aggregate fair value amount of derivative instruments that contain those features, and the aggregate fair value amount of assets that would be required to be posted as collateral or transferred under the provisions about the triggering of the contingent features. On the one hand, the risk of financial swaps, which is reflected by the quantitative information in the balance sheet and income statement, can be judged by reports users, according to fluctuations of the quantitative information; on the other, the risk of financial swaps can be explained or calculated directly with the changes of interest rates and exchange rates. The author considers that, to provide a more visually risk information, quantifying the risks of financial swaps should be penetrated deeply in China. For example, disclosure of VAR (value at risk) information, disclosure of K-line graph of the value of VAR etc. Meanwhile, the descriptive information of financial swaps risk should be further concretized in report notes, and the relevant hedging measures should be disclosed.
4 Conclusion
In China, financial swaps and other derivative financial instruments are in increasingly widespread application, and their accounting recognition, measurement and so on, which are still the cutting-edge issues in the international accounting profession, are developing and perfecting. Before they are well developed we will inevitably face some difficulties. When the financial swaps and other derivative financial instruments could not be comprehensively, clearly and reliably expressed in financial statements, report users could still make right decisions if there are full and proper disclosures in the
513
notes, so as to minimize the negative impact of immature standards. At present, as china is improving the accounting standards of derivative financial instruments with Chinese characteristics, we should draw on the advanced accounting standards of disclosures about derivative financial instruments from other countries, to develop disclosures about derivative financial instruments in China.
References
[1]. FASB Statement No.161: Disclosures about Derivative Instruments and Hedging Activities. [2]. Barbara Apostolou and Nicholas G. Apostolou. Derivatives: New Disclosures Required [J]. Accounting & Auditing, 2008, (11): 28~36. [3]. Ministry of Finance. P.R.China. Accounting Standards for Business Enterprises (2006) [M]. Beijing: Economic Science Press, 2006(in Chinese) [4]. Li Xiaohua. The Study of Accounting Information Disclosure of Financial Swaps [D]. North China University of Technology, 2008(in Chinese) [5]. Wang Dongjun. Innovative Approaches of Accounting Disclosures about Derivative Instruments [J]. Research of Financial and Accounting, 2007, (9): 17~18(in Chinese)
514
doc_362002450.pdf