CDS Fair Value Accounting at Level 3

[Luci]

Hello everyone,

I have a fairly simple question regarding U.S. GAAP credit derivatives accounting.

I read in GS's financial statements on p. 114 here http://sec.gov/Archives/edgar/data/886982/000095012309001278/y74032e10vk.htm#190 that they had 89,858 mil. USD of total credit derivatives assets and 51,460 mil. USD of total credit derivatives liabilities in Nov 2008.

Does it mean that their position was LONG (i.e., they bought CDS/TRS) 89,858 mil. USD and they were SHORT (i.e., they had written CDS/TRS) 51,460 mil. USD in fair value terms?

Or is LONG/SHORT in U.S. fair value derivatives accounting irrelevant and do Assets mean that the derivative has a positive fair value and Liabilities mean that the derivative has a negative fair value?

My reason for asking is that I am writing this diploma paper and as an European I wouldn't like to get it the other way or even the wrong way since it's gonna get read and graded.

I would very much appreciate any expert help.

Cheers,

Luci

 

[Dmitrij]

Not an expert, but I would think that the first explanation you offer is correct. Since the liabilities side typically displays how an entity "financed" its assets, it seems to me that a short position is an obligation to a counterparty, and therefore could be considered a liability. If it had a negative fair value, I think it would be subtracted from the original amount on either side of the balance sheet. So losses would simply be netted - in other words, if there would be a loss in a long position, it would be recorded in the income statement; the derivatives on the asset side would be credited and the equity would be decreased on the right side.

Though I'm really not an expert. Just offering you my intuition.