Summary of Statement No. 161

Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133


Why Is the FASB Issuing This Statement and When Is It Effective?

The use and complexity of derivative instruments and hedging activities have increased significantly over the past several years. Constituents have expressed concerns that the existing disclosure requirements in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, do not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. Accordingly, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

What Is the Scope of This Statement?

This Statement has the same scope as Statement 133. Accordingly, this Statement applies to all entities.

How Will This Statement Change Current Practice?

This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.

How Does This Statement Improve Financial Reporting?

This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments.

What Is the Effect of This Statement on Convergence with International Financial Reporting Standards?

In August 2005, the International Accounting Standards Board issued International Financial Reporting Standard (IFRS) 7, Financial Instruments: Disclosures. The scope of IFRS 7 includes all financial instruments, not just derivative instruments. The FASB decided to limit the scope of its disclosure project to derivative instruments because of its desire to not delay the improved transparency about the location and amounts of derivative instruments in an entity’s financial statements. The FASB may consider a longer term project to improve disclosures about all financial instruments and to achieve greater convergence with IFRS 7 in the future.