Contents lists available at ScienceDirect Advances in Accounting journal homepage: www.elsevier.com/locate/adiac Derivative accounting and financial reporting quality: A review of the literature Stephanie A. Hairston ⁎ , Marcus R. Brooks a School of Accountancy, Georgia Southern University, Georgia b Department of Accounting & Information Systems, University of Nevada, Reno, United States ARTICLEINFO Keywords: Derivatives Financial reporting quality Hedging Risk management ABSTRACT The financial crisis of 2008 increased the call for standard setters and financial regulators to review the ef- fectiveness of derivative regulation in improving financial reporting quality. Prior literature defines financial reportingqualityastheextenttowhichfinancialstatementsprovideinformationthatisusefultoinvestorsand creditors in their investment decisions (Schipper, 2003; Schipper & Vincent, 2003). This review summarizes the empirical evidence regarding the effectiveness of derivative regulation in achieving its stated objective. Extant literature shows that although derivative regulations have improved information provided to investors, there is still room for improvement. Recommendations from this stream of literature suggest that the Financial Accounting Standards Board (FASB) require managers to provide more complete, transparent, and forward- looking disclosures surrounding their derivative positions (Campbell, 2015; Franco-Wong, 2000). This review may be useful to standard setters, practitioners, and accounting academics by providing a synthesis of extant academic literature on the effectiveness of current derivative regulation. As the FASB and International Accounting Standards Board (IASB) continue to expand derivative accounting rules, this review may also be useful in identifying areas for future academic research. 1. Introduction Prior literature states that the main goal of the recognition and measurement requirements of accounting standards is decision useful- ness, supported by relevance, reliability, and comparability (Schipper, 2003; Schipper & Vincent, 2003). After the global financial crisis of 2008, the Financial Accounting Standards Board (FASB) and Interna- tional Accounting Standards Board (IASB), sought to significantly im- prove the decision usefulness of financial instrument reporting for in- vestors. To meet this objective, the Boards created the Financial Crisis Advisory Group (FCAG). The FCAG’s primary objective was to identify accounting issues that required immediate attention, with a specific focus on financial instruments. The Group defined effective financial reporting as providing “information about the financial position and performance, and about changes in the financial position of an entity that is useful to a wide range of users in making economic decisions, with primacy given to the needs of providers of debt and equity capital (FCAG, 2009).” The FCAG identified several areas of weakness related to deriva- tive accounting. These weaknesses included difficulty in applying fair value accounting in illiquid markets, the delayed recognition of losses associated with financial instruments, and the complexity of ac- counting standards for financial instruments. In their final report, the FCAG classified these weaknesses as a detriment to effective financial reporting (FCAG, 2009). The findings of the FCAG ultimately led to several regulations aimed at improving accounting for derivatives. Included in these regulations are the most recently released Ac- counting Standard Update (ASU), ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 provides additional guidance on derivative and hedging transactions. The regulation expands and at- tempts to simplify accounting for certain derivative instruments and hedge relationships. The FASB proposes that the new standard will help entities facilitate financial reporting that more closely reflects an entity’s risk management activities (FASB, 2017). The overall goal of ASU 2017-12 is to set forth regulations that provide greater trans- https://doi.org/10.1016/j.adiac.2018.10.003 Received 16 May 2018; Received in revised form 11 October 2018; Accepted 14 October 2018 ⁎ Corresponding author at: 621 COBA Dr., P.O. Box 8141, Statesboro, GA 30458, United States E-mail addresses: shairston@georgiasouthern.edu (S.A. Hairston), marcusbrooks@unr.edu (M.R. Brooks). Advances in Accounting 44 (2019) 81–94 Available online 01 November 2018 0882-6110/ Published by Elsevier Ltd. T