Research On Issues Of Derivative Financial Instruments Accounting

In the past 20 years, Derivative Financial Instruments have been developed rapidly. As a bilateral contract aiming for avoiding risk, derivative financial instruments infuse new vigor into the market; they provide dealers with an effective tool to hedge risk as well as make profit; therefore, they largely promote the stability and development of the financial market. Currently, the transaction scale and the variety of derivative financial instruments have made them an important component of current financial market and their influence upon the development of global economy is fundamental and deeply. However, the unique characteristics of derivative financial instruments also make them become a financial instrument with high risk. Derivative financial instruments help investor hedge risks and make profit, but at the same time they also bring a large amount of risks to their holders. Improper using of derivative financial instruments has already induced destructive strike to many corporations.The emergence of derivative financial instruments and their unique characteristics also bring challenge to traditional accounting book keeping and recording system. The foundations of traditional accounting system, such as the definition of accounting constituents, historic cost principle and realization principal etc, all face severe challenges from derivatives. Most of derivative financial instruments are contracts that have not yet been carried out or are in the process of carrying out. When the derivative contract is signed, the real transaction has not yet happened, but under traditional accounting reporting system, only those events resulted from past events can be recognized as assets or liabilities. Therefore, under traditional accounting system, derivative financial instruments can only be treated off balance sheet and can not be presented on the balance sheet. What's more, the matter concerning recognizing and measuring the movements of fair value of derivative financial instruments between initial recognition and discontinuing recognition is also a hot potato.Reasonable and effective recognizing and measuring of derivative financial instruments are essential to the reliability and relevance of accounting information. Therefore, IASC, many countries, accounting groups and researchers have done a lot onthis topic. A series of researching results have been published, such as IAS32, IAS39, SFAS133 etc, aiming to guiding and regulating those issues regarding accounting recognition, measurement and disclosure of derivative financial instruments. Among these results, new definitions and conceptions were put forward and adopted. The definition of financial asset and financial liability provide theoretical basis upon which recognition of derivative financial instruments in the balance sheet becomes valid. Fair value has also been publicly accepted to be the most relevant attribute to measure the movement in the price of derivative financial instruments.The main content of this paper is analyzing, comparing and summarizing different researching results about accounting for derivative financial instruments. The paper iscomposed of four chapters. Chapter 1------Brief Introduction Of Derivative FinancialInstruments, introduces the definition, characteristics, classification, origin anddevelopment of derivative financial instruments; Chapter 2------Derivative FinancialInstruments And Related Accounting Researching, first analyses challenges faced by traditional accounting system caused by derivative financial instruments and the necessity and impendency to strengthen the accounting regulation for derivative financial instruments; Following this, the paper generalizes the researching result on this issue of IASC and other countries; Finally, this chapter introduces the development history and accounting researching status of derivative financial instruments in ourcountry; Chapter 3------The Accounting Recognition Of Derivative FinancialInstruments, discusses the basic issues on the accounting recognition and initial recognition and discontinuing recognition of derivative financial instruments; Chapter4------Accounting Measurement And Disclosure OF Derivative Financial Instruments,discusses how to measure the movement in the price of derivative financial instruments and how to disclose relevant detail information in the note to the balance sheet, and what is more, suggestes that company should compute and disclose the "adjusted EPS" in the note to financial reports to better reflect the impact on the corporation of derivative financial instruments.