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Essay / Research Paper Abstract
This 5-page paper examines the FASB's proposed amendment to its No. 133, and describes why the amendment is necessary. Bibliography lists 3 sources.
Page Count:
5 pages (~225 words per page)
File: D0_MTcreditde.rtf
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Unformatted sample text from the term paper:
45. According to the FASB, the projects purpose is to improve credit derivative disclosure and guarantees so financial statement users can have a better understanding of the derivatives impact
on financial performance and cash flows of credit derivatives sellers and guarantors (FASB, 2008). This particular project addresses the issues of credit default swaps (CDS), which have become a pretty
important factor in the credit derivatives market (FASB, 2008). Its especially become a focal point in recent months for market participants and regulators due to the credit meltdown of 2007
(FASB, 2008). Thanks to the turmoil in credit markets, some credit derivative sellers have experienced actual and potential defaults on referenced obligations guaranteed by their CDS (FASB, 2008). The end
result is sellers with large liabilities associated with actual and potential defaults, which could end up with actual or potential downgrades by credit agencies (FASB, 2008). A credit downgrade could
further undermine buyers of the derivatives in question, as the downgrades would have a direct impact on the purchased derivatives fair value (FASB, 2008). The only tool that remotely addresses
this situation is FASBs Statement No. 133, entitled Accounting for Derivative Instruments and Hedging Activities (FASB, 2008). Originally introduced in 1998, FASB 133 was a method by which financial executives
could measure all financial assets and liabilities on a company balance sheet at fair value, with hedging fitting into an overall risk management objective documented in a companys risk management
philosophy (Hwang and Patouhas, 2001). To qualify for hedge accounting, the entity needed to prove that the hedging relationship could "be highly effective in achieving offsetting changes in fair value
or cash flows for the risk being hedged" (Hwang and Patouhas, 2001). FASB 133 also ended up changing what was then the existing definition of derivatives. Basically, the ruling loosened
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