Decisions of FAS 133
FAS 133 is based on the following four cornerstone
decision made by the FASB. Cornerstone Decision I:
Derivatives are contracts that create rights and obligations
that meet the definitions of assets and liahiüties (thus these
rights and obligations are reported in the balance sheet—not
in an "off-balance-sheet" manner).
Cornerstone Decision 2: Fair value is the only relevant
measure for reporting of derivatives (thus derivatives are
reported in the balance sheet at their fair values—whether or
not they hedge an item).
Cornerstone Decision 3: Only items that are assets or
liabilities are reportable as such on the balance sheet (thus
losses on derivatives cannot be deferred and reported as
assets; likewise, gains on derivatives cannot be deferred and
reported as liabilities).
Cornerstone Decision 4: Cains and losses on derivatives
must be reported in earnings currently—except in certain
specified situations in which the gains and losses must be
initially reported in other comprehensive income.
Furthermore, in certain specified situations in which the gain
or loss on the hedging transaction must be reported in
earnings currently, the normal accounting for the hedged item
must be altered so that the offsetting loss or gain on the
hedged item is also reported currently in earnings. The
accounting treatment for both types of these certain specified
situations comprises what is collectively referred to as "hedge
accounting," which is discussed next.