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DEMYSTIFYING DERIVATIVES ACCOUNTING
Adding Value Through Corporate Disclosure, Market Data and FAS 133 Compliance

A Special Report Sponsored By

JULY 2002

A Special Report from

July 2002

MAKE RISK AN ADVANTAGE

DEMYSTIFYING DERIVATIVES ACCOUNTING
Adding Value Through Corporate Disclosure, Market Data, and FAS 133 Compliance
Since their rise to popularity in the early 1970s,people have viewed derivatives with both awe and fear. Derivatives users range from traders, who seek to profit by making markets and speculating on price fluctuations, to end-users, who use derivatives to hedge and protect their natural exposure to input or output prices. Almost without exception, managing and accounting for derivatives is second nature to banks and to derivatives market makers.But even among the most sophisticated players we have seen spectacular blow-ups that are not directly linked to valuation or accounting tools, but rather, result from flaws in a firm's policy and business processes. To avoid a similar fate, all companies must adopt sound derivatives accounting policies. In this paper, we first offer help for companies struggling with derivatives accounting and laythe foundation for a sound hedging program. We then focus on the importance of independent market data, the cornerstone of any serious derivatives accounting plan. Finally, Kiodex’s CFO offers a frank discussion on decreasing a company's risk profile.

CONTENTS
PREPARE YOUR POLICIES Derivatives Accounting Compliance
The right business process can make derivatives accounting and FAS 133compliance more than just a corporate necessity.

2

POSITION YOUR COMPANY A Case for Independent Market Data
What is quality data? For a company that doesn't have it, it often means a serious hit to bottom line profits.

6

PROTECT YOUR VALUE Adding Value Through Corporate Disclosure
Discover what smart managers already know: A strategic accounting process for derivatives reduces risk,decreases cost of capital, and increases stock price.

9

THE KIODEX RISK WORKBENCHSM: THE ACCOUNTING TOOLS
1

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© 2002 Kiodex, Inc.

PREPARE YOUR POLICIES

DERIVATIVES ACCOUNTING COMPLIANCE
Help for companies struggling with derivatives hedging instruments, and an explanation of the business process required to support a hedging program
By Joachim Emanuelsson

settled and outstandinghedges on a company's balance sheet. Although the definition is simple, the process of accurate derivatives reporting is complex, and may span several departments in addition to finance or accounting. To be successful today, companies must achieve integrity, discipline, and reliability in the business process that drives their derivatives accounting practices. Perhaps due to the complexity andever-changing regulatory issues surrounding derivatives accounting, corporations are often unable to maintain even the minimum standards of compliance, much less use the process to their advantage. Too often, corporations simply take an existing business process that works well for procuring commodities in the physical markets or for buying business insurance and then proceed to shoehorn derivativesaccounting and hedging into this established paradigm. Inevitably, this approach fails: In the best case, the corporation incurs the expense of remedying the problems; in the worst, the corporation loses its reputation. This paper is designed to help companies understand and adopt derivatives accounting "best practices," and to avoid the pitfalls. This attitude generally translates to developingopaque derivatives accounting processes known only to the finance and accounting departments; capturing static derivatives data without audit functionality in Excel or Lotus spreadsheets; relying on internally generated market data; and consolidating trade execution and valuation duties in the same person or team. A few public companies even fake compliance and defy disclosure standards; for...
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