The Missing Parts of SFAS 133

Accounting for Derivative Instruments and Hedging Activities

**
Bob Jensen at Trinity
University**

**Table of Contents**

Guidance for Fair Value Estimation of Custom Derivatives

Guidance for Amortization Calculations

Guidance for Computing Interest Accruals

Guidance for Fair Value Estimation of Custom Derivatives

Probably the most gaping hole in SFAS 133 is the lack of guidance on valuation of custom contracts that are not traded in exachange markets. This is serious, because over half of the financial instruments derivative contracts are estimated to be custom interest rate swaps and forward contracts. I am made a stab at dealing with this issue in Working Paper 231.

The FASB's Derivatives Implementation Group website is at http://www.rutgers.edu/Accounting/raw/fasb/digsum.html

Guidance for Amortization Calculations

Like its predecessor ED 162-B, SFAS 133 does not provide an explanation of how the "amortizations of basis adjustments" are calculated. For example, in Paragraph 117 of Example 2 on Page 65, there is no explanation of how to derive the amortizations of 156, 208, 2759, 3069, 3391, and 2479. Fortunately there is enough information to derive theses values. You can see this in my Example 2 tutorial Excel file that can be downloaded along with my other SFAS 133 tutorials at http://faculty.Trinity.edu/rjensen/133sfas/13300pas.htm

Guidance for Computing Interest Accruals

The FASB failed to include guidance on how to compute interest accruals in SFAS 133
examples. For instance in Example 2 in Paragraph 117, there are some accruals
(i.e., 19, 17, 216, 181, 134, 46) that cannot be derived from the data given in the
illustration. Similarly, there are accruals (i.e., 330, 1210, 1380, 870, 670, 440,
40) in Paragraph 137 of Example 5 that cannot be derived. In both examples we would
have to be given **yield curves**
to solve for these numbers. We would also have to be given guidance as to which of
several methods can be used for such derivations. SFAS 133 does not delve into
mentioning or explaining these methods. You can read more about this in my Example 5
Excel file tutorial at http://faculty.Trinity.edu/rjensen/133sfas/13300pas.htm

We hope that the FASB will include our proposed calculation corrections in the table on Page 75 of FAS 133 and add our proposed explanation of the yield curve derivations to the FASB's Amendments to FAS 133.

The Hubbard and Jensen paper is can be downloaded as follows:

Working Paper 305: Some Corrections and Explanations of Example 5 in FAS 133

The HTML version is at http://faculty.Trinity.edu/rjensen/caseans/133ex05.htmThe revised spreadsheet is at http://faculty.Trinity.edu/rjensen/caseans/133ex05a.xls

**The main source of news and details that I provide
readers is at http://faculty.Trinity.edu/rjensen/acct5341/speakers/133glosf.htm
**