Analysts' responses to alternative methods of reporting unrealised gains and losses on derivatives

Allied Academics
Publication Type:
Journal Article
Academy of Accounting and Financial Studies Journal, 2004, 8 (1), pp. 1 - 27
Issue Date:
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With the publication of two statements on accounting for derivatives (SFAS 133 and SFAS 138), the Financial Accounting Standards Board (FASB) has taken another substantial step on the path toward its goal of requiring the reporting of all financial instruments at market value, generally with unrealized gains and losses included in income. This study investigates whether reporting an unrealized gain or loss in a separate line item on the income statement, as opposed to disclosure only in a footnote, affects how financial analysts use and evaluate information on such gains and losses. The vehicle for this research is unrealized gains or losses on derivatives. The study consisted of short financial analysis cases, presented to financial analysts and executives primarily through mail surveys. Each subject received one of the four different possible combinations of derivative gain or loss and disclosure type. When the unrealized derivative gain/loss was included as a separate line item in the income statement, analysts included the gain/loss significantly more often in their P/E ratios, and were more likely to list the derivative as a factor affecting their investment recommendation, than when the derivative gain/loss was disclosed only in a footnote.
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