Forex Investment and Currency Trading

Both FAS 133 and IAS 39 are based on common principles.

These include:

• Derivatives should be recorded on the balance sheet as either assets or liabilities
• The appropriate value for derivatives is their fair value
• Changes in fair value of derivatives should be recorded directly in earnings each period unless special “hedge accounting” is applied
• Special hedge accounting treatment should be limited

What does this mean?

• For countries that have yet to adopt International Financial Reporting Standards (IFRS) and are currently accounting for derivatives off-balance sheet, adopting IAS 39 will create greater transparency
• If certain types of hedging relationships or hedging instruments do not qualify for special hedge accounting, then the change in fair value of these derivatives will create volatility to earnings
• Companies tend to alter their derivative usage in order to qualify for hedge accounting whenever possible
• Contrary to popular belief, derivatives that are entered into within a quarterly accounting period must still be accounted for at fair value (marked to market) through earnings
• Any discussion of hedging solutions without an accounting solution is an incomplete solution
  Some of the countries that will adopt IFRS in the future: Chile in 2009; Brazil in 2010; Canada, India, and South Korea in 2011