What is FAS 133?
Statements of Financial Accounting Standards 133, also known as FAS 133, is an accounting standard that requires companies to calculate all assets and liabilities on their balance sheet at fair value. Issued by the Financial Accounting Standards Board (FASB) in June of 1998, FAS 133 was created because of major hedging losses.
Where have you heard about FAS 133?
If you’re involved in hedging, you’re likely to know about FAS 133. It attempts to manage and discipline corporate hedging not as earnings management but as risk management. All derivatives that fall under the umbrella of FAS 133 must be documented at fair value as an asset or a liability.
What you need to know about FAS 133.
In order to qualify for FAS 133 within hedge accounting, a hedged item and its hedging instrument is required to have a correlation ratio of between 80% and 125%. In addition, the reporting company must have the relevant hedging documentation in place at the inception of the hedge. Hedge accounting cannot be met if these criteria is not applied. The inapplicability of hedge accounting can lead to major volatility in corporate earnings. Now that FAS 133 has been in place and used for almost 20 years, it's better understood by firms and more tolerated in terms of its impact on earnings.