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CORPORATE FINANCIAL REPORTING

17A - Financial Reporting for Derivatives. CORPORATE FINANCIAL REPORTING. F INANCIAL R EPORTING O F D ERIVATIVES. Many business believe reporting for derivatives is the hardest thing the FASB has invented.

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CORPORATE FINANCIAL REPORTING

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  1. Dilutive Securities and EPS 17A - Financial Reporting for Derivatives CORPORATE FINANCIAL REPORTING

  2. FINANCIAL REPORTING OF DERIVATIVES Many business believe reporting for derivatives is the hardest thing the FASB has invented. We’ll only scratch the surface of the topic so you have an adequate understanding of them.

  3. WHAT IS A DERIVATIVE? It is a financial instrument that derives its value from the movement of prices, interest rates, or exchange rates associated with an underlying item.

  4. DERIVATIVESThe General Rules Vail Resorts (MTN) is selling at $78.20 today. CONTRACT I promise to sell you 100 shares of MTNfor $68.20/shareanytime you want between today and December 31, 2014.

  5. DERIVATIVESFAS 133(ASC 815) Says - Two General Rules: ◊ derivatives should appear on the balance sheet at their fair value and ◊ changes in their fair value should appear on the income statement

  6. DERIVATIVES But FAS 133 has exceptions to the general rules. The exceptions are for derivatives used for hedging, which are designed as a form of risk management. FASB says there are three kinds of hedges: Cash flow hedges Fair value hedges Foreign currency hedges-in ACCT 4/5250

  7. DERIVATIVES One Exception Your company has 1,000 pounds of copper which is selling for $3.20/pound today. Your company mined the copper at a total cost of $3.00/pound. Do you know how much cash you will get when you sell the copper? Another company will need 1,000 pounds of copper in December. It offers your company $3.50/pound for the copper and asks for delivery in December. Your company signs a contract to do that.

  8. DERIVATIVES Another Exception Your company has 1,000 pounds of copper which is selling for $3.20/pound today. Your company mined the copper at a total cost of $3.00/pound. Do you know how what the fair value of your copper will be in the future? Another company will need 1,000 pounds of copper in December. It offers your company $3.50/pound for the copper and asks for delivery in December. Your company signs a contract to do that.

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