Futures Contracts & Accounting Implication?

Question

What are some of the accounting challenges associated with going into futures contracts?

Answer 1

You need to disclose the fair value of the contracts (as well as the purpose and extent of their use) in notes to financial statements.

Answer 2

Unlike stocks and bonds, futures are marked to market. This means that you need to pay a margin up front and everyday you position is debited or credited depending on market movements. Thus your account is "marked" up/down to the market value.

This can generate daily cash flows between brokers and the futures exchange which cause a lot of paperwork and accounting treatment.

Also, due to higher degrees of leverage in futures markets, companys will often disclose futures market exposure in annual reports, 10-K and 10-Q filings. I'm more of a finance person and don't know much about GAAP but I'd imagine there are specific rules that make things messy.

It may also depend on whether you a speculator or a hedger. Exchanges have "spec limits" which mandate a maximum number of a given contract you can hold unless you can demonstrate you hold the underlying asset. This means that McDonald's can hold many more beef futures than Eddie Murphy's character from Trading Places.

Answer 3

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Answer 4

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