A Case-based Introduction to Bank Accounting for Derivatives

Abstract

This short case introduces accounting and finance students and practitioners to bank accounting for derivatives using Goldman Sachs 2013 financial statements as an illustrative case. The technical knowledge assumed is very basic. We begin with the basic accounting equation of assets = liabilities plus equity, or alternatively assets – liabilities = equity. We then proceed to find derivative assets and liabilities on the balance sheet (we need to do some digging to find the balance-sheet accounts containing them). We then proceed to discover that the actual fair values of derivatives assets and liabilities are much larger than those included in the balance sheet. Furthermore, the vast majority of these “fair values” are somewhat subjective Level 2 values. We conclude by examining another source of unrecognized liabilities representing potential payouts from credit derivatives. We summarize by showing the off-balance sheet derivative assets represent 88% of total assets, while off-balance sheet derivative liabilities represent 103% of reported total liabilities.