Last week the FASB issued Statement 161, "Disclosures about Derivative Instruments and Hedging Activities." It requires firms to put in their financial statements what should have been in them from the start of Statement 133, back in 2000. Perhaps most notably, it requires this most basic of disclosures:
"An entity with derivative instruments shall disclose information to enable users of the financial statements to understand:
a. How and why an entity uses derivative instruments
b. How derivative instruments and related hedged items are accounted for under this Statement and related interpretations
c. How derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows."
Simple, eh? If an annual report was really supposed to be an exercise in communicating with shareholders, this would be a natural place to begin. Any illumination on those fundamental issues would help investors - provided they don't wind up being boilerplate. But - an annual report (or an interim report, at that) is not an exercise in communication with the firm's owners. It's an exercise in compliance. It's a shame that it requires a FASB statement to get the most basic communications on derivatives done right.
Of course, it doesn't stop there. The standard also requires much more tabular disclosure about fair values of derivatives positions and the geography of derivative instruments, and gains and losses therefrom, within the financial statement package. For anyone who's ever tried to pick this stuff out of financials, the standard will be a blessing - if proper "compliance" occurs.
We'll have to wait a while to see how effective it is. The standard won't go into effect until years and interim periods beginning after November 15, 2008. While earlier adoption is encouraged, it's not often that firms are fans of increasing their disclosures on most financial instruments. Don't hold your breath waiting for early adopters to pop up in 2008, especially in times of stress in financial markets.