Financial reporting of derivatives holds accounting and disclosure reports are to some extent responsible for the hype and media attention to regulators on disclosure. Perhaps then, BNET argues its ease of convenience to analyze issues of disclosure before diving into problems adhering to accounting standards by the FASB (Financial Accounting Standards Board).
“Derivative financial instruments are financial contracts whose values depend on-and are derived from-the value of an underlying asset, reference rate, or index.” -BNET.com
CFO.com reports:
“Five firms hold 80% of derivatives risk.”
About 80% of the derivative assets and liabilities carried on the balance sheets of 100 companies reviewed by Fitch were held by five banks: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Those five banks also account for more than 96% of the companies’ exposure to credit derivatives.
Hedging Commodity Risks
For the report, the rating agency reviewed first-quarter 2009 filings of the companies, which come from a range of industries and represent almost $6.4 trillion in aggregate outstanding debt. The companies also recorded a total notional amount of derivative positions of more than $296 trillion.
While “derivatives trading by utilities and energy companies appear to be very limited,” for instance, “most of the companies reviewed in both industries report the use of derivatives for hedging commodity risks…”
“…..Exxon Mobil — the biggest U.S. energy company — had no derivative exposure at the end of the first quarter. Instead, the company appears to rely on what’s called natural hedges — countervailing trends within the corporation itself — to manage potential risks.”
“The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms — IBM, General Motors, Verizon, Comcast, Textron, and PG&E — reported exposure to share-based derivatives.”
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Though derivatives disclosure review much, where investors and analysts would very much welcome this addition into the financial reporting, the question remains: To which extent transparency can be at its optimum level, and would investors and analysts be careful enough to scrutinize well and good?
Let us know what you think.
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