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Articles on hedge accounting
This document reviews 3 articles on hedge accounting: 1) SFAS 133 hedge accounting numbers were less associated with market values than alternative matching methods. Accelerating gains/losses recognition generated numbers more associated with equity values. 2) SFAS 133 fair value accounting improved banks' earnings' explanatory power for stock returns versus non-fair value. 3) Transparent hedge disclosures under SFAS 161 attracted new airline competitors and positively impacted stock returns. Competitors used disclosures in market decisions.
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Articles on hedge accounting
- 1. 2014 1 VINCENT KONADUTAWIAH 3 ARTICLES REVIEW ON HEDGE ACCOUNTING
- 2. ARTICLE 1 Derivative recognitionand hedge accounting treatment: An empirical studies of rules prescribed by SFAS 133 and some alternatives Steve Fortin PhD Thesis 1999 University of Waterloo, Canada.
- 3. BACKGROUND SFAS 133 isnot consistent with matching principle because only the derivatives side of the hedge is marked to market. SFAS 133 (Statement of Financial Accounting Standard) “Accounting for Derivative Instruments and hedging activities.
- 4. OBJECTIVES To determine whetheraccounting numbers based on matching principles are strongly associated with market values than those produce under SFAS 133. To investigate whether accelerating the recognition of gains and losses on derivatives and hedged items generates balance sheet accounting numbers are strongly associated with firm common equity value than historical cost accounting numbers.
- 5. METHODOLOGY Sample: 22 goldmining firms from 1992-1997 Model specification: Barth (1994) & Ohilson (1995) Data analysis: panel data analysis regression analysis.
- 6. FINDINGS Two set matchedbalance sheet numbers show more explanatory power for common equity than SFAS 133 Matching both sides generated more information than keeping both sides of the hedge off the balance sheet.
- 7. MY COMMENTS Is balancesheet bias Data is subjective because of voluntary disclosures of SFAS as of the time Transitory earnings of Gold mining firms Gold is not a common hedging instrument for all business OTC does not have active market price. Extension of the research on other hedge items
- 8. ARTICLE 2 Income StatementEffects of Derivative Fair Value Accounting: Evidence from Bank Holding Companies HUI ZHOU PhD Thesis 2011 University of Illinois at Urbana-Champaign USA
- 9. OBJECTIVE To evaluate thefair-value hedging performance of SFAS 133 on value risk relevance of accounting earnings
- 10. METHODOLOGY Sample: 168 uniquebanks from 1995-2005 6 years before SFAS 133 and 5 years after its implementation Data analysis: descriptive statistics regression correlation
- 11. FINDINGS Positive autocorrelationbetween fair-value based hedging and performance Fair value based under SAFAS 133 earnings outperform non fair value in terms of stock returns Fair value has incremental explanatory power over stock returns Fair value under SFAS 133 improves the value and risk relevance of accounting earnings
- 12. MY COMMENTS The resultsand findings is only true for banks Is income statement bias The pre-SFAS 133 is subjective Further research can be extension of the study on other sectors Comparison between fair value based and cash flow hedging on earnings management.
- 13. ARTICLE 3 Strategic EntryDecisions, Accounting Signals, and Risk Management Disclosure Youli Zou PhD thesis 2013 University of Toronto USA
- 14. OBJECTIVES Investigates the economicconsequence of hedge accounting Stock market reactions to disclosures Relationship between hedging disclosures and potential entry.
- 15. DATA AND METHODOLOGY Sample;2000 busiest routes of Airlines from 2001-2010 USA Analysis; regression model, descriptive statistics and correlation.
- 16. FINDINGS Transparent riskand hedging disclosure attracts new companies. The attraction is more stronger after the adoption of SFAS 161 Statistically significant positive relation between stock returns and adoption of SFAS 161 Competitors use hedge accounting signals and disclosures in making market decisions Additional risk may distort firms hedging and production behaviors
- 17. MY COMMENTS The researchdoes not set what is additional disclosures The airline business is too unique so the findings cannot be generalized Complex methodology
- 18. CONCLUSION Hedge accounting isa complex practice hence much research has not be done on it. Even the few research is USA based with complex methodology and inconclusive findings. More research is needed to find the relevance of it in financial statements