Analysis on Financial Risks of Derivation and Preventive Measures

Yu Pan,Fan Wu

doi:10.5539/ibr.v2n4p73

Abstract

Financial derivatives, as innovative financial instrument, have been designed for enterprises to avoid financial risks. Most of these derivatives rely on future trends of traditional tools, such as valuation, interest rates and exchange rates. Such expected future transactions or events can not be recognized as assets because they do not meet the definition of assets, economic resources owned or controlled by enterprises and only made by past transactions. The use of the traditional accounting model does not accurately disclose this kind of off-balance-sheet items, and their impact on financial statements. This paper provides some methods for enterprises and government to appropriately recognize and reveal the risks and benefits of financial derivatives.

Highlights

Financial Derivatives have been designed based on the traditional tools
Known as innovative financial instruments, financial derivatives, which rely on future trends of financial instruments, such as valuation, interest rates and exchange rates, pay a small amount of bonds or gold and sign an inter-period contract or swap transactions of different forms of new financial instruments
From the concept of assets and liabilities, the assets are economic resources owned or controlled by enterprises; they can only be made by past transactions and the expected future transactions or events that can not be recognized as asset

Summary

Introduction

Known as innovative financial instruments, financial derivatives, which rely on future trends of financial instruments, such as valuation, interest rates and exchange rates, pay a small amount of bonds or gold and sign an inter-period contract or swap transactions of different forms of new financial instruments. They are principal instruments for enterprises to avoid financial risks. The use of the traditional accounting model does not accurately disclose these transactions and the impact on of enterprises’ financial situations are not reflected in the statements, and this is inappropriate to the extremely alarming risk caused by financial derivatives. The author will talk about this issue

The impact on basic concepts of financial accounting

The impact on recognized accounting standards

The impact on the disclosure of financial report

Proposed control measures for the financial risks of derivatives