You are on your first in-charge assignment at a client's office. The president of the company, Antoine Schecter, has agreed to go over the company's investments with you. Everything is going well until you begin to discuss the company's interest rate swap, which you have recorded as a liability. "Wait a minute!" Schecter exclaims. "That thing didn't cost us a dime, so there's no way it should be included in our financial statements! And even if it was, it's an investment, so it should be an asset, not a liability!"

1. Explain to Schecter why the FASB believes that derivatives should be accounted for at fair market value and evaluate how an interest rate swap could become a liability.

2. Use the conceptual framework to support your explanation but remember Schecter is not an accountant.

3. Defend and support why the derivatives should be accounted for at historical cost.