The Missing Parts of FAS 133
Accounting for Derivative Instruments and Hedging Activities
Bob Jensen at Trinity University
Table of Contents
Guidance for Fair Value Estimation of Custom Derivatives
Guidance for Amortization Calculations
Guidance for Computing Interest Rate Swap Values
Guidance for Fair Value Estimation of Custom Derivatives
Probably the most gaping hole in FAS 133 is the lack of guidance on valuation of custom contracts that are not traded in exachange markets. This is serious, because over half of the financial instruments derivative contracts are estimated to be custom interest rate swaps and forward contracts. I am made a stab at dealing with this issue in Working Paper 231.
The FASB's Derivatives Implementation Group website is at http://www.rutgers.edu/Accounting/raw/fasb/digsum.html
Guidance for Amortization Calculations
Like its predecessor ED 162-B, FAS 133 does not provide an explanation of how the "amortizations of basis adjustments" are calculated. For example, in Paragraph 117 of Example 2 on Page 65, there is no explanation of how to derive the amortizations of 156, 208, 2759, 3069, 3391, and 2479. Fortunately there is enough information to derive theses values. You can see this in my Example 2 tutorial Excel file that can be downloaded free along with my other FAS 133 if you send me an email request at rjensen@trinity.edu
You can read about how to compute the interest accruals in both Example 2 and Example 5 of FAS 133 by going to the Excel file links at http://www.trinity.edu/rjensen/caseans/133ex05d.htm.
Guidance for Computing Interest Rate Swap Values
The FASB failed to include guidance on how to compute interest rate swap values in FAS 133 examples. In neither Example 2 nor Exampl 5 are readers provided with yield curves to solve for swap valuations given in those examples (i.e., on Pages 65 and 75 of FAS 133). We would also have to be given guidance as to which of several methods can be used for such derivations. FAS 133 does not delve into mentioning or explaining these methods. You can read more about this in my Example 5 Excel file tutorial at http://www.trinity.edu/rjensen/133FAS/13300pas.htm
You can read about how to compute the interest rate swap values in both Example 2 and Example 5 of FAS 133 by going to the Excel file links at http://www.trinity.edu/rjensen/caseans/133ex05d.htm.