The FASB’s SFAS 133 requires booking of selected financial instruments derivative at "fair value" on the balance sheet and subsequent recording of changes in fair value as either current income or deferred income (classified as comprehensive income). SFAS 133 offers no guidance beyond the previous FASB’s SFAS 107 (1991) with respect to estimating fair value for derivatives that are not traded in exchange markets or are traded in markets too thin for reliable value estimation. SFAS 107, however, offers little help for estimating fair value of interest rate swaps since these swaps are nearly always private contracts that are not traded at all or are not traded in markets deep enough to provide fair value estimates.

The major purpose of this paper is to propose a legal settlement exit value estimation of fair value. An amortization (discount) alternative is introduced using changes in fair value. It will be argued that the legal settlement rate is more appropriate for the purpose of booking interest rate swap receivables/payables on the balance sheet. This rate is more in line with recent recommendations of mark-to-market or fair value reporting of derivatives. It has the added advantage of societal symmetry between what companies report as swap receivables and what other companies report as swap payables. Present methods for computing these amounts have societal asymmetries. It is also shown how the legal settlement discount rates can be adjusted for changing term structures of interest rates.

Lastly, the paper shows a graphical approach to interest rate risk driver sensitivity analysis in answer to a call for these types of analyses for interest rate swaps by the AAA Financial Accounting Standard Committee (1995b, p. 93). Requiring such graphs and related disclosures will help to overcome the primary criticism of SFAS 133 on derivatives and hedging. This paper recommends a means of both quantifying and graphing market risk exposures. The market risk variable to be quantified is defined in Equation (14). The market risk graph is illustrated in Exhibit 5.