Research On Hedge Accounting For Derivative Financial Instruments

In recent decades , a prominent phenomenon in risk management field is that derivative financial instruments are being widely used in all kinds of risk management. At the same time, many world-shaking financial crises are coming forth in succession. Itseems that each crisis or storm is closely related to derivative financial instruments. Facing these innovative financial instruments with the characteristics of two-edge-sword, which means derivative financial instruments not only can be used in risk management, but are enormous risk- containers in themselves, how to effectively supervise them from accounting purpose is an emergent problem. Corresponding to the two sides characteristics of derivative financial instruments , enterprises manage them mainly for two purposes. One is hedging to evade risks, and the other is speculating to gain from risks. Different holding purposes have different economic effects, hence the accounting supervision on derivative financial instruments should be different according to the holding purposes. This article focuses on how to faithfully reflect the enterprises' hedging practices by means of derivative financial instruments from accounting purpose, which is hedging accounting.As the most complicated part of derivate financial instrument accounting , hedge accounting is that when meeting certain criteria, to recognize the offsetting fair value or cash flow of hedging instruments and hedged items in the accounting earnings in same period. Due to the risk management characteristic of derivative financial instruments, most hedging instruments are derivative financial instruments. And, this article only researches into hedge accounting when only derivative financial instruments are used as hedging instruments. Hedge accounting is a kind of special accounting for derivative financial instruments. In hedge accounting, the accounting for hedging instruments and hedged items are closely related, and the normal procedures of recognition and measurement for hedging instruments and hedged items are changed to recognize the offsetting profit or loss in the income statement at the same time. Hence, hedge accounting can faithfully reflect the efforts and effects of the risk management of the hedging entity. In this way, the derivative financial instrument's effects of hedge and resources allocation can be effectively exerted.The development and perfect of hedge accounting are based on integrated, systematic and mature basic accounting theories for derivative financial instruments. Whether they are designated as hedging instruments or not, the derivative financialinstruments follow the general accounting regulations for derivative financial instruments, such as recognition, measurement and disclosures etc. Only when derivative financial instruments become a part of hedge relation, the accounting for derivative financial instruments keeps to some special regulations in some aspects, such as the subsequent recognition and subsequent measurement of hedge instruments, additional disclosure requirements etc. Thus, it is necessary to elaborate on the basic accounting theories for derivative financial instruments, before conducting deep research into hedge accounting.This article is divided into five chapters. Due to the necessity referred above and in order to make a systematic discussion, it occupies two chapters to systematically discuss on the basic theories for derivative financial instruments and derivative financial instruments accounting. The first chapter mainly elaborates on some basic problems of derivative, such as definition, features and categories of derivative financial instruments. The basic accounting theories for derivative financial instruments are discussed in the second chapter. The issue of IAS39 and FAS 133 indicates the framework of general accounting principles has been primarily constructed. Although in our country the Finance Ministry has no concrete plan to formulate the accounting standard, the research on the basic accounting theories for derivative financi...