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Abstract

This paper discusses accounting for options, forward contracts, futures contracts, and other related securities used for hedges. An examination of the accounting and finance literature, authoritative pronouncements, and accounting theories leads to the conclusion that the accounting treatment of hedges does not reflect economic reality. A theoretical framework for accounting for all hedge activities, regardless of the techniques or contracts used to hedge, is presented. The paper concludes that the Financial Accounting Standards Board should not continue its incrementalism approach for establishing accounting standards for options, forwards and futures contracts. Instead, existing GAAP should be codified into one comprehensive statement on hedge accounting.

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Accounting for Options,Forwards and Futures Contracts

Abstract

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