The derivatives market has been increasing at an impressive pace over the last twenty years, both in terms of traded volume and financial instruments available. Although losses occurred for companies whose names were familiar to the public in general, along with the innumerous warnings given by the media about the risks involved in this kind of instruments, derivatives have been used by a wide range of companies, since they allow for the transfer of either market or credit risk to third parties. The aforesaid losses were due to the relative lack of knowledge with which these instruments have been used. Moreover, these instruments were always considered complex and rather sophisticated and, in the first instance, they were not accounted for, i.e., they were considered offbalance sheet items and, consequently, many companies used them to escape from legal demands, thus maintaining the assets' risks in their balance sheets, when they should really avoid this kind of procedures. In this article, our objective was concentrated on the definitions of a derivative instrument, seeking to show the evolution in its accounting treatment. Finally, the approach of SFAS 133 is treated, which measures derivatives differently, demonstrating that their accounting treatment by means of fair value is an evolution in comparison with the "old" historical cost method.
Derivatives instruments; Fair Value; Off-balance sheet; Disclosure