Derivative Financial Instruments, The Accounting Problems

After the 70's of 20 century, the Bretton Woods system disorganized, the world-class mineral oil crisis burst, the tide of financial liberalization and technological revolution rose. In such circumstance, the derivative financial instruments have been developed rapidly in the international financial markets. However, the emergence of derivative financial instruments and their unique characteristics not only brought great destructive power, and also bring challenge to traditional accounting theory. Over the years, through the collaboration standard-setting bodies and the continuous efforts of scholars from different countries, they made a breakthrough progress in derivatives accounting and formed a relatively complete system of accounting standards for derivatives. Now clear statements are included on the recognition of derivative financial instruments, the introduction of the fair value measurement and the idea that take different accounting treatment for different purposes. But as the sub-prime crisis broke out, many problems exposed and amplified the consequences of the crisis. Accounting standards are so complex that makes them difficult to understand and put in practice. The defects of fair value measurement amplified the consequences of the crisis. To solve these problems, International Accounting Standards Board and U.S. Financial Accounting Standards Board began make adjustments on the accounting of derivative financial instruments. Recently, IASB has issued a new standard for financial instruments, and I believe that we will see a new derivative accounting standards soon.Firstly, it analyzed the characteristics of derivative financial instruments, such as derivatives, leverage and cross-trading. These features have impact on the traditional accounting theory, which made the recognition and measurement of derivatives have some difficulties. Based on that analysis, the paper summarizes the previous accounting research on how to solve these difficulties. The main ideas are from SFAS133, which proposed two important breakthroughs:(1) Derivative instruments represent rights or obligations that meet the definitions of assets or liabilities and should be reported in financial statements. (2) Fair value is the most relevant measure for financial instruments and the only relevant measure for derivative instruments. In accounting practice, there are several accounting standards on the accounting treatment of derivative financial instruments, including hedge accounting and financial instruments. As a whole, this paper summarized these standards. Comparing by IFRS, SFAS and CAS, the accounting treatment of derivative financial instruments are almost similar, except slight differences in a few specific items such as forward contract. Recently, IASB released IFRS9 and some discussion draft of the derivative financial instruments. They show that the long-term trend of derivative financial instruments accounting is complete adoption of the fair value and the cancellation of hedging accounting. But in the short-term, it will face a lot of obstacles, so the best plan should be to simplify the accounting of derivative financial instruments. At present, major obstacle to implement of derivative financial instruments accounting in china is how to ensure the reliability and operability of fair value and reduce the complexity of hedge accounting and the lack of the corresponding mature derivatives markets. Therefore, we should improve financial accounting standards and establish a sound framework for determining fair value, while developing Chinese financial market and cultivating professional and technical personnel.