... Today, the accounting profession defines derivatives as, “devices used to shelter a corporation from risks for which they have little or no control. “The fair values or cash flows from derivatives offset the changes in fair value or cash flows of the assets or liabilities at risk. Corporations are able, with the use of derivatives, to ensure protection against fluctuations caused by the different types of risks the entity encounters. ...
As illustrated in the aforementioned example, financial institutions rely heavily on derivatives. Fannie Mae uses derivatives to hedge against fluctuations in interest rates on the issuance of debt, without drastically increasing the risk associated with changing interest rates, concentrated mainly in mortgage portfolios. ... The use of derivatives enables Fannie Mae to modify debt, thereby achieving a cost-effective plan of conducting a profitable business. ...
In accordance with FASB 133, Fannie Mae now recognizes all derivatives on their balance sheet at fair value. ... Coca-Cola Company is a major corporation that has make many changes in its accounting practices for derivatives. ... Derivatives in gain positions are included in assets at the amount of 3,666 million dollars for 2002 and 954 million dollars in 2001. ... Derivatives in a loss position are clearly disclosed in the liability section of the balance sheet for the amounts of 5,697 million dollars in 2002 and 5,069 million dollars in 2001. ... This adjustment for changes in accounting regulation clearly accounts for the much smaller gain reported in this year. ... A Cumulative effect of change in accounting principle, net of tax is recognized as a loss of 168 million dollars in 2001. ... Coca-Cola’s Consolidated Statement of Income reports for 2001, the cumulative effect of accounting change for SFAS 133. ... A net gain of 92 million dollars on derivatives was reported in 2001 and a net loss in 2002 of 186 million dollars. ...
Fannie Mae continues to clearly state objectives for the use of derivatives throughout the notes to the financial statement. ...
Coca-Cola explained the use of derivatives in each section of the notes that pertained to derivative use. ... Fannie Mae provides extensive information on the use of derivatives, what they mean and how they apply to the institution. ... In reading Coca-Cola’s 10K report, users without detailed knowledge of accounting practices, would have a difficult time grasping the concept of derivatives and how they affect the corporation’s ability to hedge the risks that are associated with the ever-changing economic environment.
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