Derivatives Disclosure Misses Mark for Corporate Issuers – Report

Investors should be aware of the often counter-intuitive effects of derivatives on the financial statements, according to a study of derivatives usage and hedge accounting and reporting for corporate entities conducted by Fitch Ratings. The agency identified a surge in derivatives product availability and the advent of mark-to-market hedge accounting under FAS 133 and IAS 39 as key drivers of change. According to the report, the effect of hedge accounting can often be to shift income statement volatility associated with mark-to-market on derivatives to the balance sheet, potentially skewing important credit ratios. “Credit ratios need to be looked at with and without hedge accounting to appreciate creditworthiness fully,” said Bridget Gandy, co-author of the report and Managing Director, Fitch Ratings. Fitch studied approximately 60 companies across a variety of sectors in order to understand the current state of corporate financial reporting for derivatives. The study’s focus primarily was on derivatives usage and hedge accounting under US GAAP.


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