Accounting for derivatives and their representation in financial reporting: problems of methodology and procedure

Economic Annals-ХХI: Volume 156, Issue 1-2, Pages: 116-120

Citation information:
Pylypenko, L. (2016). Accounting for derivatives and their representation in financial reporting: problems of methodology and procedure. Economic Annals-XXI, 156(1-2), 116-120. doi: https://doi.org/10.21003/ea.V156-0027

Liubomyr Pylypenko
PhD (Economics),
Associate Professor,
Lviv Polytechnic National University
12 Bandera Str., Lviv, 79013, Ukraine
lpylypenko@ukr.net

Accounting for derivatives and their representation in financial reporting: problems of methodology and procedure

Abstract. Derivatives are one of the most effective tools of financial risk management. However, efficient hedging and evaluation of related risks by external stakeholders require a proper level of information support that causes the need for development of methodology of accounting for derivatives and their representation in financial reporting.

The purpose of the article is to study the problem issues of methodology and procedure of accounting for derivatives, transactions with them and their representation in financial reporting.

The analysis of current methods and practices of accounting for derivatives has allowed us to identify certain problem issues, in particular: the appropriateness and reasonableness of the balance sheet recognition of derivatives, the determination of their original cost, the choice of approaches and methods of recognition of derivatives’ revaluation results, the results of hedge or speculative transactions with derivatives and their reflection in accounts and financial reporting, etc. The study refuted the possibility of qualification of underlying assets’ contracted prices as the fair prices of derivatives. It was established that the method of derivatives’ revaluation accounting for depends on their functional use, type of hedging transactions and their performance, and is quite complicated and ambiguous.

Limitations, complexity and ambiguity of accounting for derivatives procedure are largely caused by the imperfection of accounting methodology of owners’ equity. The existing paradigm of accounting in general and accounting for owners’ equity in particular have been formed at the junction and compromise of various theoretical concepts (including capital preservation concepts) that makes impossible the efficient solution of revealed problems.

Keywords: Derivatives; Financial Instruments; Hedging; Accounting; Financial Reporting

JEL Classification: G13; M41

DOI: https://doi.org/10.21003/ea.V156-0027

References

1. Expert: New financial crisis is coming. Online edition «FundMarket».
   Retrieved from http://fundmarket.ua/news/zhkspyert-gryadyet-novyy-finansovyy-krizis-20110530154351 (in Russ.)
2. Engdahl, W. (2008). The Financial Tsunami has not reached its Climax.
   Retrieved from http://www.warandpeace.ru/ru/hots/view/24125/ (in Russ.)
3. Map and area (2015). Forbs Ukraine, 2(48), 78-81 (in Russ.).
4. Prymostka, L. (2001). Financial derivatives: analytical and accounting aspects. Kyiv: KNEU (in Ukr.).
5. Zdrenyk, V. (2011). Accounting and control transactions with derivatives: organization and methods. Ternopil: Krok (in Ukr.).
6. Ksendzuk, V. (2015). Accounting and analysis of hedge currency risks. Zhytomyr: Zhytomyr Technological State University (in Ukr.).
7. Sohatska, O. (2002). International futures markets: theoretical and methodological aspects. Ternopil: Kart-blansh (in Ukr.).
8. Holov, S., & Kostyuchenko, V. (2004). Accounting and financial reporting according to international standards. Kyiv: Libra (in Ukr.).
9. Ministry of Finance of Ukraine. Financial instruments (Accounting Standard No. 13).
   Retrieved from http://zakon2.rada.gov.ua/laws/show/z1050-01 (in Ukr.).
10. Financial Instruments: Disclosures (International Financial Reporting Standard 7).
    Retrieved from http://ec.europa.eu/internal_market/accounting/docs/arc/2005-11-30-annex-ifrs7_en.pdf
11. Financial Instruments (International Financial Reporting Standard 9).
    Retrieved from http://zakon2.rada.gov.ua/laws/show/929_016 (in Ukr.)
12. Financial Instruments: Presentation (International Accounting Standard 32).
    Retrieved from http://zakon0.rada.gov.ua/laws/show/929_029 (in Ukr.)
13. Financial Instruments: Recognition and Measurement (International Accounting Standard 39).
    Retrieved from http://zakon2.rada.gov.ua/laws/show/929_015 (in Ukr.)
14. National Securities And Stock Market Commission (2012). Guidelines for display in the accounting operations of futures and option contracts by stock market participants (Law of Ukraine).
    Retrieved from http://www.irbis-nbuv.gov.ua/cgi-bin/irbis_nbuv/cgiirbis_64.exe?I21DBN=LINK&P21DBN=
    UJRN&Z21ID=&S21REF=10&S21CNR=20&S21STN=1&S21FMT=ASP_meta&C21COM=
    S&2_S21P03=FILA=&2_S21STR=Oif_apk_2012_3_3 (in Ukr.)
15. National Bank of Ukraine (2007). Approval of Instruction on accounting of banks transactions with derivatives in Ukraine (Law of Ukraine).
    Retrieved from http://zakon3.rada.gov.ua/laws/show/z1104-07 (in Ukr.)
16. Price waterhouse Coopers (2013). Guide to Accounting for Derivative Instruments and Hedging Activities.
    Retrieved from https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc_derivatives_2013.pdf
17. Terry, D. (2008). Warfield. Intermediate Accounting: Principles and Analysis. Wiley.
18. Ministry of Finance of Ukraine (2015). Instructions on the application of the Plan of Accounts for assets, capital, liabilities and business operations of enterprises and organizations (Law of Ukraine).
    Retrieved from http://zakon5.rada.gov.ua/laws/show/z0893-99 (in Ukr.)

Received 23.01.2016