The Research On Risk Of Derivative Financial Instrument And Related Accounting Problem

Derivative financial instruments are derived from traditional financial instruments since 1970s. Derivative financial instruments can be benefit for the investor; on the other side it can take great risk. Both the bankruptcy of Enron and the great deficit of China Aviation Oil (Singapore) Corporation Ltd are related to derivative financial instruments. So how to prevent the risk from the derivative financial instruments and enforce the regulation and management of risk has been given more and more concern.Management decisions must base on trustworthy economic information, and seventy percent of economic information come from accounting system, so the management of derivative financial instrument risk depend on the support of accounting system. In a series of Basel Committee on Banking Supervision report, the inadequate disclosure of accounting information and its negative effect on the regulation was disclosed adequately since 1988, and require more on the development of risk management technique and the disclosure of accounting information. How to disclose derivative financial instrument risk efficiently in financial report is an important topic for accounting theory research.This paper is composed of four chapters to discuss the problem.Chapter 1. The risk of derivative financial instruments and its measurement. Risk of derivative financial instruments and the measurement method will be introduced in this chapter, and this is the basement of the disclosure of this article.Chapter 2. Accounting recognition of derivative financial instruments. Derivative financial instruments are not match with the accounting elements definition and accrual basis in the frameworks of the traditional accounting. So its entry into the financial report should depend on the related accounting system amendment.Chapter 3. Accounting measurement of derivative financial instruments. The historic cost is adopted in traditional accounting, but it is not fit for the measurement of derivative financial instruments, and could notprovide relevant information for the investor. The fair value accounting model is the best to measure the derivative financial instruments. Also the fair value accounting model needs to be improved for its unreliability.Chapter 4. Disclosure of derivative financial instruments risk. The disclosure of derivative financial instruments could not meet the requirements of outwards report users, this chapter suggest that more information should be disclosed in report. The forecast message of risk should be enhanced as for the contents of disclosure, the K line of VAR could be applicable towards the disclosure form, the timely report should be used for disclosure methods. Surely this paper would be beneficial for the development of derivative financial instruments accounting theory.