The Financial Accounting Standards Board has decided to tackle four separate hedge accounting issues, including proper use of “the shortcut method,” to provide new guidance targeted at helping companies comply with complex derivatives rules. The Board stopped short, however, of agreeing to amend hedge accounting rules to allow a risk-based approach to fair value and cash flow hedges of nonfinancial assets and liabilities.
Hedge accounting is governed primarily by Financial Accounting Statement No. 133 Accounting for Derivative Instruments and Hedging Activities, which in 1999 generally established that companies must report derivative instruments as assets or liabilities at fair value. It has been cited, however, as the cause of accounting problems in dozens of restatements in 2005 alone. Accounting experts agree it is among the most complex aspects of U.S. Generally Accepted Accounting Principles.
