-68-
system was that new financial instruments created potentially
large risks not reported on the balance sheet. Forward
contracts, for example, typically require no exchange at
inception, so the transaction-based value would be zero at
inception and would remain zero until maturity. At maturity, the
cash settlement would determine income or loss, without any value
ever appearing on the balance sheet.
A second concern with the transaction-based system was that
firms could sell appreciated on-balance-sheet investments to
report gains and leave investments that had declined in value
reported on the balance sheet at their original cost. A third
impetus for increasing the use of market value information in
financial reports was the greater acceptance of theoretical
models and the wider availability of financial data to support
more reliable and informative reports. For example, although
models of option pricing existed in the academic finance
literature in the 1970s, their acceptance in accounting practice
began only in the mid-1980s.
5. SFASs
From in or about March 1990 through June 1998, the FASB
worked on its financial instruments project. As part of that
28(...continued)
the appropriate accounting for such hedges. SFAS No. 52 does not
discuss the appropriate accounting for nonhedging swaps such as
those at issue.
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