Abstract This article discusses the U.S. Financial Accounting Standards Board's (FASB) projects on derivatives and hedging activities and on reporting comprehensive income. Hedge accounting is special accounting that alters what the accounting would otherwise have been for the components of a hedging relationship. Hedge accounting is oriented toward the income statement because it seeks to have the changes on the hedged item and the hedging instrument be reported in earnings in the same accounting period. Its objective is to recognize concurrently in earnings the effects of changes in market rates or prices on two or more positions that share an exposure to a market factor. The board began its formal deliberations on derivatives and hedge accounting in January 1992. Those deliberations have gone on almost continuously since then. During that time, the project probably has consumed more of the board's attention than any other topic on its agenda. The FASB considered several alternatives in developing its proposals for derivatives and hedge accounting. Mark-to-market hedge accounting cannot he used for hedges of cash flow exposures he-cause there are no gains or losses on the hedged items that can he either marked to market or marked toward market. As a result, a variation of the comprehensive income approach would he used, under which gains or losses on hedging instruments would not be reported in earnings, but rather reported as a component of equity. When the expected cash flow ultimately occurs, the accumulated gain or loss on the hedging instrument would he included in earnings to counterbalance that cash flow.
Johnson et al. (1996) studied this question.