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Derivatives have been blamed in recent years for many financial disasters and there is evidence that disclosure influences hedging activity and corporate value. Nevertheless, standards for the mandatory disclosure of derivatives usage have been very controversial. This paper examines the nature and determinants of voluntary disclosures of currency derivatives usage by large industrial firms under SFAS 107 and has implications for the new derivatives disclosures under SFAS 133. This study documents that, consistent with higher disclosure levels being associated with lower cost of capital and higher shareholder value, firms with higher quality voluntary disclosures have higher market/book value ratios. However, consistent with agency, political, and disclosure cost arguments, industry leaders and firms with higher executive compensation in the form of stock options are more likely to have poor voluntary disclosure. In addition, we do not find any evidence indicating firms with more exposure to currency risk or firms with higher levels of currency derivatives usage provide increased disclosure of derivatives activity.

There has been considerable interest in developing stochastic volatility and jump-diffusion option pricing models, e.g. Hull and White (1987, Journal of Finance, 42, 281–300) and Merton (1976, Journal of Financial Economics, 3, 125–144). These models, however, have some undesirable aspects that arise from introducing some non-traded sources of risks to the models. Furthermore, the models require much analytical complications; thus, if they are applied to American options then it is not easy to acquire practical implications for hedging and optimal exercise strategies. This paper examines the American option prices and optimal exercise strategies where the volatility of the underlying asset changes over time in a deterministic way. The paper considers two simple cases: monotonically increasing and decreasing volatilities. The discussion of these two simple cases gives useful implications for the possibility of early-exercise and optimal exercise strategies.

This paper investigates the effects of SFAS 133 on earnings volatility, earnings predictability, and equity volatility in bank holding companies (BHCs). In contrast to large BHCs' assertion prior to the adoption of SFAS 133, the three income-affecting portions (i.e. hedge ineffectiveness gains/losses, gains/losses excluded in the assessment of effectiveness, and effects from canceled forecasted transactions once designated as cash flow hedge) did not increase earnings volatility in the top 30 BHCs for the first 12 quarters after adoption. Also, the three income-affecting portions did not deteriorate analysts' forecast performance. In addition, there is no evidence that volatility of stockholders' equity significantly increases due to SFAS 133. Further investigation of notes to financial statements reveals that some BHCs adjusted their usage of derivatives prior to SFAS 133 to mitigate the impact of SFAS 133 on earnings volatility.

Fitch Ratings has completed its first study of derivatives accounting and disclosure among corporate entities, excluding financial institutions. Derivatives have become an integral part of the risk management framework for major corporate issuers of debt, allowing active management of interest rate, foreign exchange, commodity price, and equity exposures. Moreover, the growing use of derivatives coincides with rapid developments in the derivatives market, including the availability of a broader range of derivative products. Fitch surveyed 57 global corporations to assess the types of derivatives used, accounting and financial reporting implications, and disclosure quality. This survey was intended to generate representative data only and is not necessarily reflective of the market as a whole. The paper presents the key findings and other important industry issues.

This paper evaluates the disclosures about derivative financial instruments provided by the 30 high-profile companies tracked in the Dow-Jones Industrial Average (DJIA-30). We discuss investors' needs for information on financial risk, document how the DJIA-30 implemented the requirements of FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities" (SFAS 133), analyze the usefulness of SFAS 133 requirements, and comment on recent controversies over derivatives reporting. We also examine how the DJIA-30 complied with the SEC requirements for qualitative and quantitative information about the market risks attributed to their derivatives positions, and the impact of SFAS 133 adoption on these disclosures.

We find the DJIA-30 generally increased their derivatives' disclosures after adopting SFAS 133, consistent with its requirements. However, the disclosures are not as informative as one might expect, given SFAS 133's detailed requirements. Many companies now omit the previously required table of notional amounts, making it more difficult to assess their exposure to financial risk. Moreover, SEC requirements allow three formats for reporting quantitative information, only one of which is the tabular approach that helps users understand exposure. Because few companies use the tabular approach, disappearance of notional amounts is more serious. Generally small in recognized financial effects, derivatives and hedging activities are combined with other items in the financial statements, thereby complicating analyses of their impact. Footnote disclosures isolating derivatives performance tend to be incomplete and disconnected. Finally, we find that required 12-month forecasts of unrealized derivatives gains and losses reclassified from accumulated other comprehensive income to earnings miss the mark by a wide margin, rendering them unreliable in forecasting future earnings effects.

To date, Rolls-Royce — the world-leading power Systems Company for aerospace, marine and energy markets — has prepared its accounts in compliance with UK Generally Accepted Accounting Principles ("UK GAAP"). EU regulations require Rolls-Royce to adopt IFRS in its financial statements from 2005. A study was begun by the Group in 2002, in conjunction with our auditors KPMG Audit Plc, to review what changes would be required in order to move from UK GAAP to IFRS. Restatements of our 2004 results are un-audited, but the auditors have agreed to the principles that have now been adopted by the Group. This transition report shows reported earnings per share for 2004 up by 29%, as compared with the figure announced in February (and underlying earnings per share or EPS up by 7%). There was no change to the Group's guidance on trading performance for 2005. Under IFRS, however, underlying profits for 2005 are expected to be significantly ahead of current market expectations, which are based on UK Generally Accepted Accounting Principles. There is no effect on the Group's trading cash flows and no effect on the Group's management of its businesses. The "underlying profits" will be retained as a key measure of operating performance, with some redefinition.