Accounting for financial derivatives and its effects on earnings volatility

Upon the request of many constituents, the Financial Accounting Standards Board in the US has been engaged to draft and enact some regulations for derivatives and hedging activities since January 1992. FASB published an Exposure Draft in June 1996, after about two years of discussions and analysis, FASB issued Accounting for Derivative Instruments and Hedging Activities. The new regulation is effective for all fiscal quarters and years after June 15, 1999 and it applies to all industries and enterprises. The purpose of this paper is to discuss problems of previous accounting guidance for derivatives and h edging activities, to illustrate the requirements of the new accounting regulations in this respect, and to discuss some of the potential concerns of this new approach. We also extend the empirical research in Jan (2001), which provides evidence showing that the uses of derivative securities and discretional accounting accruals are negatively correlated.