HAS SFAS 133 MADE DERIVATIVES REPORTING MORE TRANSPARENT? A LOOK AT THE DOW-JONES 30

Abstract

This paper evaluates the disclosures about derivative financial instruments provided by the 30 high-profile companies tracked in the Dow-Jones Industrial Average (DJIA-30). We discuss investors' needs for information on financial risk, document how the DJIA-30 implemented the requirements of FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities" (SFAS 133), analyze the usefulness of SFAS 133 requirements, and comment on recent controversies over derivatives reporting. We also examine how the DJIA-30 complied with the SEC requirements for qualitative and quantitative information about the market risks attributed to their derivatives positions, and the impact of SFAS 133 adoption on these disclosures. We find the DJIA-30 generally increased their derivatives' disclosures after adopting SFAS 133, consistent with its requirements. However, the disclosures are not as informative as one might expect, given SFAS 133's detailed requirements. Many companies now omit the previously required table of notional amounts, making it more difficult to assess their exposure to financial risk. Moreover, SEC requirements allow three formats for reporting quantitative information, only one of which is the tabular approach that helps users understand exposure. Because few companies use the tabular approach, disappearance of notional amounts is more serious. Generally small in recognized financial effects, derivatives and hedging activities are combined with other items in the financial statements, thereby complicating analyses of their impact. Footnote disclosures isolating derivatives performance tend to be incomplete and disconnected. Finally, we find that required 12-month forecasts of unrealized derivatives gains and losses reclassified from accumulated other comprehensive income to earnings miss the mark by a wide margin, rendering them unreliable in forecasting future earnings effects.