This presentation brings out some thoughts on how hegdging transaction are accounted for USA

1. 2014 1
VINCENT KONADU TAWIAH
3 ARTICLES REVIEW ON HEDGE
ACCOUNTING

2. ARTICLE 1
Derivative recognition and hedge accounting
treatment: An empirical studies of rules prescribed
by SFAS 133 and some alternatives
Steve Fortin
PhD Thesis 1999
University of Waterloo, Canada.

3. BACKGROUND
SFAS 133 is not consistent with matching principle
because only the derivatives side of the hedge is
marked to market.
SFAS 133 (Statement of Financial Accounting
Standard) “Accounting for Derivative Instruments
and hedging activities.

4. OBJECTIVES
To determine whether accounting numbers based
on matching principles are strongly associated
with market values than those produce under
SFAS 133.
To investigate whether accelerating the
recognition of gains and losses on derivatives and
hedged items generates balance sheet accounting
numbers are strongly associated with firm
common equity value than historical cost
accounting numbers.

5. METHODOLOGY
Sample: 22 gold mining firms from 1992-1997
Model specification:
Barth (1994) & Ohilson (1995)
Data analysis: panel data analysis
regression analysis.

6. FINDINGS
Two set matched balance sheet numbers show
more explanatory power for common equity
than SFAS 133
Matching both sides generated more
information than keeping both sides of the
hedge off the balance sheet.

7. MY COMMENTS
Is balance sheet bias
Data is subjective because of voluntary
disclosures of SFAS as of the time
Transitory earnings of Gold mining firms
Gold is not a common hedging instrument for all
business
OTC does not have active market price.
Extension of the research on other hedge items

8. ARTICLE 2
Income Statement Effects of Derivative Fair
Value Accounting: Evidence from Bank Holding
Companies
HUI ZHOU
PhD Thesis 2011
University of Illinois at Urbana-Champaign USA

9. OBJECTIVE
To evaluate the fair-value hedging
performance of SFAS 133 on value
risk relevance of accounting earnings

10. METHODOLOGY
Sample: 168 unique banks from 1995-2005
6 years before SFAS 133 and 5
years after its implementation
Data analysis: descriptive statistics
regression
correlation

11. FINDINGS
 Positive autocorrelation between fair-value based
hedging and performance
 Fair value based under SAFAS 133 earnings
outperform non fair value in terms of stock returns
 Fair value has incremental explanatory power over
stock returns
 Fair value under SFAS 133 improves the value and risk
relevance of accounting earnings

12. MY COMMENTS
The results and findings is only true for banks
Is income statement bias
The pre-SFAS 133 is subjective
Further research can be extension of the study on
other sectors
Comparison between fair value based and cash flow
hedging on earnings management.

13. ARTICLE 3
Strategic Entry Decisions, Accounting
Signals, and Risk Management Disclosure
Youli Zou
PhD thesis 2013
University of Toronto USA

14. OBJECTIVES
Investigates the economic consequence of hedge
accounting
Stock market reactions to disclosures
Relationship between hedging disclosures and
potential entry.

15. DATA AND METHODOLOGY
Sample; 2000 busiest routes of Airlines from
2001-2010 USA
Analysis; regression model, descriptive
statistics and correlation.

16. FINDINGS
 Transparent risk and hedging disclosure attracts new
companies.
 The attraction is more stronger after the adoption of SFAS 161
 Statistically significant positive relation between stock returns
and adoption of SFAS 161
 Competitors use hedge accounting signals and disclosures in
making market decisions
 Additional risk may distort firms hedging and production
behaviors

17. MY COMMENTS
The research does not set what is additional
disclosures
The airline business is too unique so the findings
cannot be generalized
Complex methodology

18. CONCLUSION
Hedge accounting is a complex practice hence
much research has not be done on it.
Even the few research is USA based with
complex methodology and inconclusive findings.
More research is needed to find the relevance of
it in financial statements