FAS 161 – Disclosures about Derivative Instruments and Hedging Activities, an amendment to FAS 133

Plugged In
Linda Cavanaugh
CPA

By: Linda Cavanaugh, CPA I did not think I would ever get this finished. The new disclosures are not overly difficult for a small company like mine, but I think bigger companies are going to pages and pages of disclosures.

The objective of FAS 161 – Disclosures about Derivative Instruments and Hedging Activities, an amendment to FAS 133 is to provide enhanced disclosures for derivative instruments that meet the following three objectives:

1.How and why an entity uses derivative instruments.
2.How derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations.
3.How derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

If information about derivative instruments is located in more than one footnote, the footnotes must be cross-referenced so that an investor can find all of the information that is required to be disclosed.

Paragraph 44 of FAS 133 has been amended to add disclosures for every annual and interim reporting period for which a balance sheet and income statement are presented. The disclosures are to be segregated by the underlying risk exposure, the risk management strategy and hedging strategy. In addition, an entity can choose to disclose its overall risk exposures even if those risks are not managed using derivative instruments.

These disclosures include:
a) an entity’s objectives for holding or issuing derivative instruments,
b) the context needed to understand those objectives,
c) its strategies for achieving those objectives,
d) the volume of each category.

FAS 161 adds paragraphs 44C – 44E to FAS 133. Paragraph 44C requires tabular disclosures for every annual and interim reporting period that a balance sheet or income statement is presented. The disclosure is segregated by asset and liability, risk management strategy (i.e. hedge or no hedge) and by each type of instrument.

This statement does a good job at providing examples of the disclosures needed. Especially the tables. I haven't figured out how to do tables in this format, so please go to www.fasb.org for a better presentation.

First Table

(This is just one half of the table. The same disclosures need to be made for liability derivatives also.)

Fair Values of Derivative Instruments

Derivatives designated as hedging instruments under Statement 133

$ in millions Asset Derivatives as of December 31,
2010 2009
Location Fair Value Location Fair Value
Interest
rate
contracts Other Assets $xx,xxx Other Assets $xx,xxx

Foreign
Exchange
Contracts Other Assets xx,xxx Other Assets xx,xxx

Commodity
Contracts Other Assets xx,xxx Other Assets xx,xxx

Total derivatives designated as hedging instruments under Statement 133 $xx,xxx $xx,xxx
Derivatives not designated as hedging instruments under Statement 133

2010 2009
Location Fair Value Location Fair Value
Interest
rate
contracts Other Assets $xx,xxx Other Assets $xx,xxx
Foreign
Exchange
Contracts Other Assets xx,xxx Other Assets xx,xxx
Commodity
Contracts Other Assets xx,xxx Other Assets xx,xxx
Total derivates not designated as hedging instruments under Statement 133 $xx,xxx $xx,xxx
Total Derivatives $xx,xxx $xx,xxx

Second Table

The Effect of Derivative Instruments on the Income Statement
For the years ended December 31, 2010 and 2009

This table needs to show derivative information for fair value hedges, cash flow hedges, net investment hedges and non-hedges. It nees to show the location of the gain(loss), the amount of the gain(loss)recognized in income (and/or if applicable OCI), and the amount of the gain(loss) reversed out of OCI into income. Just like the balance sheet table above, the disclosure needs to be broken down by type of instrument. This table is too complicated for me to figure out how to post it here, but again go to www.fasb.org and the Statement has some lovely examples.

For derivative instruments that are included in an entity’s trading activity and are not designated or that do not qualify for hedge accounting can elect to present the following table instead of the above disclosures:

The Effect of Trading Activities on the Statement of Financial Performance for the Years Ended December 31, 2010 and 2009
Type of Instrument Trading Revenue
2010 2009
Fixed income/Interest Rate $xx,xxx $xx,xxx
Foreign Exchange xx,xxx xx,xxx
Commodity xx,xxx xx,xxx
Total $xx,xxx $xx,xxx

Line Item in Statement of Financial Performance Trading Revenue
2010 2009
Principal/Proprietary Transactions $xx,xxx $xx,xxx
Asset management income xx,xxx xx,xxx
Other Income xx,xxx xx,xxx
Total $xx,xxx $xx,xxx

Paragraph 44D requires additional information concerning the credit risk of derivative instruments to be disclosed for every annual and interim reporting period for which a statement of financial position is presented. These disclosures should include the existence and nature of credit-risk contingent features, the circumstances in which the features could be triggered and the aggregate fair value of derivative instruments that are in a net liability position. Also, the aggregate fair value of any collateral that is already posted at the end of the reporting period and the aggregate fair value of any additional collateral and/or the aggregate fair value of assets needed to settle the instrument should be disclosed.

FAS 161 is effective for fiscal years beginning after November 15, 2008 and early adoption is encouraged. Prior year disclosures are not required at initial adoption. (i.e. only one year in 2009, two years in 2010 and three years in 2011 and thereafter) For a calendar year company, the first quarter 2009 10Q would need to include the new disclosures.

Other considerations:

FAS 107 – Disclosures about Fair Value of Financial Instruments is amended by FAS 161 by adding paragraph 15A which requires disclosures about all significant concentrations of credit risk arising from all financial instruments. These disclosures should include information about the activity, region or economic characteristic that identifies the concentration, the maximum amount of loss due to credit risk that the entity would incur if the parties failed to perform under the contracts, the entity’s policy on collateral, and the entity’s policy of entering into master netting arrangements to mitigate the credit risk of financial instruments.

This blog

Linda is a CPA living in Southwestern Ohio, working as a research accountant for an investor-owned publicly traded utility company. She specializes in implementing new FASB and SEC requirements and FAS 133 derivative issues. In her role at the utility she has encountered many issues and written many memos, so send in your implementation and derivative issues and Linda will help figure out an answer.

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