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
Dr. Hubbard and I are sending to the FASB as part of our comment on the FASB's Exposure Draft No. 207-A entitled Accounting for Certain Derivative Instruments and Certain Hedging Activities: an amendment of FASB Statement No. 133 --- http://www.rutgers.edu/Accounting/raw/fasb/draft/amend133_ED.pdfWe 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