Financial Reporting for Foreign Exchange Derivatives.

Abstract

Abstract A major objective of the FASB's financial instruments project, inclusive of SFAS 105, SFAS 107 and SFAS 119, is to provide information useful to investors in assessing the credit and market risk associated with the use of off-balance-sheet financial instruments. We survey 1992 SFAS 105 and SFAS 107 disclosures on Foreign Exchange Derivatives (FXD) to: (1) benchmark current practice by summarizing quantitative and qualitative disclosures of FXD, and (2) examine the usefulness of current disclosures in assessing market and credit risk related to FXD. In achieving these objectives, we provide insight into how leading U.S. multinationals operationalize accounting standards related to off-balance-sheet financial instruments and identify disclosure attributes of footnotes unarticulated to the financial statements. We conclude from our survey that (1) some firms make extensive use of FXD, (2) there is substantial compliance with SFAS 105 and SFAS 107 requirements, (3) large dealers comply with the FASB's credit risk disclosure requirements, (4) book and fair values of FXD are small relative to contract and notional amounts and (5) most importantly, disclosures providing information on market risk are deficient due to lack of both specificity and quantification. Additional disclosures required by SFAS 119 do not substantially address deficiencies related to disclosure of latent market risk.