Bridge over ocean
1 March 2007 Financial Analysts Journal Volume 63, Issue 2

Interest Rate Swaps: Accounting vs. Economics

  1. Ira G. Kawaller

With interest rate swaps being the most widely used of all financial derivative contracts, financial analysts and engineers should be keenly interested in any regulations that could influence how these tools are used. This article addresses one such regulatory aspect—namely, the accounting rules. In certain cases, these rules can result in financial reports that do not accurately represent the economic intent of derivative transactions. This essay strives to explain this disconnect and suggest (1) how accounting standard setters might consider adjusting their requirements or, independently of that adjustment, (2) how companies might want to accommodate to the current rules.

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