Jiri Strouhal, Ph.D., Department of Financial Accounting and Auditing, University of Economics, W. Churchill Square 4, Prague, 130 67, Czech Republic
Financial instruments as such raise emotions and will continue to do so in the future, as well. Before the IFRS standards were adopted in the EU, it was stock exchange in particular which required that listed companies submit financial statements in compliance with the IFRS or US GAAP. The previous research dealing with the degree of disclosure (Cooke, 1992; Meek et al., 1995), or the probability of using supranational standards (El-Gazzar et al., 1999; Murphy, 1999; Ashbaugh, 2001; Dumontier and Raffournier, 1998; Leuz and Verrecchia, 2000; Leuz, 2003) indicate a positive correlation between the listing of reporting units on foreign markets and the degree of disclosure and use of supranational standards as the basis for financial reporting.
The greatest benefit of the standard IAS 39 is considered to be the wide application of the fair value method to the measurement of financial instruments. It is true that for a long time, it was the historical costs which were considered as the principal basis of measurement and were also used in the field of reporting of financial instruments. Nevertheless, the importance and volume of derivative transactions, whose value would be zero if the historical costs model were applied, have been on the rise recently. Whittington (2005) therefore emphasises that it is much more appropriate to measure derivatives according to their present values reflected in the fair value through the application of the standard IAS 39.
Numerous studies in our professional practice have dealt with the difference between the economic and the accounting concept of hedging. Melumad et al. (1999), for instance, indicates that the application of hedge accounting in compliance with the US standard SFAS 133 leads to deviations from optimum hedging in the economic sense. However, Barnes (2001) draws attention to the fact that these deviations from economic hedging are the very consequence of the set hedge accounting model, pointing out that hedge accounting may motivate poorly performing companies to speculate and influence their economic results on a short-term basis.
This paper provides the analysis of the current situation with reporting of financial instruments under IFRS standards (for listed companies) in the Czech Republic and stress the attention on reporting under fair value concept at not such active market. The reporting of non-listed companies is to a certain extent affected by requirements compliant with the IFRS, but on the other hand the level of disclosure is still very low.
Keywords: Financial Reporting, Financial Instruments, IFRS, Czech GAAP
JEL: M41, G30