Statement of Financial Accounting Standards No. 133

Statement of Financial Accounting Standards No. 133
Title	Statement of Financial Accounting Standards No. 133
Abbr	SFAS 133
Issued	1998
Issuer	Financial Accounting Standards Board
Effective	2001
Superseded by	Accounting Standards Codification Topic 815

Statement of Financial Accounting Standards No. 133 is a United States generally accepted accounting principle pronouncement issued by the Financial Accounting Standards Board in 1998 that established comprehensive rules for accounting and reporting of derivative instruments and hedging activities. It aimed to bring transparency to financial reporting by requiring recognition of derivatives on the balance sheet and measurement at fair value, and introduced specific hedge accounting criteria. The standard affected a wide range of entities in Securities and Exchange Commission filings, Enron Corporation era debates, and industry practices across Goldman Sachs, JPMorgan Chase, and other financial institutions.

Background and Purpose

SFAS 133 was developed in response to concerns raised by high-profile events such as the Long-Term Capital Management collapse and the evolving use of derivatives by firms including Procter & Gamble, General Electric, and Lehman Brothers. The Financial Accounting Standards Board sought to align reporting with the increasing complexity of instruments traded in markets such as the New York Stock Exchange and Chicago Mercantile Exchange, and to address issues noted by regulatory bodies like the Securities and Exchange Commission. The pronouncement reflected deliberations involving practitioner groups including the American Institute of Certified Public Accountants and academic voices from institutions such as Harvard University and University of Chicago.

Scope and Definitions

The scope defined by SFAS 133 encompassed a range of instruments including exchange-traded and over-the-counter derivatives used by corporations such as Ford Motor Company and Citigroup. Key definitions referenced in the standard—such as "derivative instrument," "host contract," and "hedging relationship"—interacted with legal and market constructs familiar to participants like Chicago Board Options Exchange and Intercontinental Exchange. The standard specified exceptions for instruments issued by entities such as Federal Home Loan Bank system members and delineated interactions with other pronouncements formerly issued by the Accounting Principles Board and successor guidance from the Financial Accounting Foundation.

Recognition and Measurement Requirements

Under SFAS 133, entities were required to recognize derivatives as assets or liabilities measured at fair value on the balance sheet, a principle that affected reporting for corporate issuers ranging from AT&T to ExxonMobil. Fair value measurement invoked valuation techniques used across markets like the London Stock Exchange and pricing inputs sourced from institutions such as Moody's Investors Service and Standard & Poor's. The standard prescribed that changes in fair value be recorded in earnings unless specific hedge accounting criteria were met; this recognition model influenced preparers including Microsoft Corporation and auditors such as PricewaterhouseCoopers and Deloitte.

Hedge Accounting Provisions

SFAS 133 established criteria for hedge accounting, differentiating fair value hedges, cash flow hedges, and hedges of a net investment in a foreign operation—a taxonomy relevant to multinational corporations including IBM, Toyota Motor Corporation, and Royal Dutch Shell. To qualify, a hedging relationship required formal designation and documentation at inception, ongoing assessment of hedge effectiveness, and specific accounting treatments for effective and ineffective portions, matters debated in practice by firms such as Goldman Sachs and Morgan Stanley. The provisions intersected with regulatory oversight from bodies like the Internal Revenue Service when tax reporting questions arose, and with international standard-setting discussions involving the International Accounting Standards Board and pronouncements like International Financial Reporting Standard 9.

Implementation and Transition Issues

Adoption and transition to SFAS 133 presented practical challenges for preparers including data collection, system changes, and retrospective application concerns faced by conglomerates such as Siemens and Siemens AG. The FASB provided implementation guidance and issued amendments, while stakeholders from the American Institute of Certified Public Accountants and market participants including Barclays lobbied for relief and clarifications. Transition issues manifested in financial statements of companies like American Airlines and Delta Air Lines due to fuel hedging programs, and necessitated coordination with banking regulators such as the Federal Reserve System and the Office of the Comptroller of the Currency.

Criticism, Litigation, and Economic Impact

SFAS 133 drew criticism from commentators and litigants including corporate issuers and audit firms for complexity, procyclicality, and operational cost, with litigation touching firms such as Enron Corporation and advisors including Arthur Andersen. Critics from academia at institutions like Massachusetts Institute of Technology and Stanford University argued about economic effects on hedging behavior, capital markets efficiency, and risk management practices at institutions such as Bank of America and Wells Fargo. The standard influenced subsequent regulatory and standard-setting responses, shaping the evolution toward codification under Accounting Standards Codification Topic 815 and fostering continued dialogue among stakeholders such as the International Monetary Fund and World Bank about financial stability and disclosure practices.

Category:Accounting standards Category:Financial regulation