Derivatives - More Disclosure Is Always Better for Financial Analysts

Implications: 1.  Value is defined by risk.  Risk deals with uncertainty of the future.  How a firm manages risk is a major determinant of its value. 2.  Accounting standards are dedicated to reporting the past.  Given it is the past, there is little risk or uncertainty regarding such events.  Merely reporting the past does not give the financial analyst the insights needed. 3.  FASB 161 tries to bridge this gap between past/present and the future.  It attempts to make management disclose intent.  It attempts to answer the following question: "How will current actions and positions affect future performance?"      

Analysis: The following is a summary of FASB 161: http://www.fasb.org/st/summary/stsum161.shtml


FASB 161 is a significant improvement in the way derivatives are disclosed.  The new FASB attempts to supplement previous FASB's (e.g., 133), by making management disclose intent and logic in their derivative positions and related risk management.

As most realize, risk management is a critical element in determining value.  Being able to evaluate this activity is clearly an improvement.  Financial analysts will have an improved view of a firm's risk management activities (e.g.,strategy, effectiveness, cost/nb
benefit, etc.)