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.