Accounting for Derivatives

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Ramirez Juan. Accounting for Derivatives

Preface

CHANGES TO THE PREVIOUS EDITION

Chapter 1. The Theoretical Framework – Recognition of Financial Instruments

1.1 ACCOUNTING CATEGORIES FOR FINANCIAL ASSETS

1.2 THE AMORTISED COST CALCULATION: EFFECTIVE INTEREST RATE

1.3 EXAMPLES OF ACCOUNTING FOR FIXED RATE BONDS

1.4 ACCOUNTING CATEGORIES FOR FINANCIAL LIABILITIES

1.5 THE FAIR VALUE OPTION

1.6 HYBRID AND COMPOUND CONTRACTS

Chapter 2. The Theoretical Framework – Hedge Accounting

2.1 HEDGE ACCOUNTING – TYPES OF HEDGES

2.2 TYPES OF HEDGES

2.3 HEDGED ITEM CANDIDATES

2.4 HEDGING INSTRUMENT CANDIDATES

2.5 HEDGING RELATIONSHIP DOCUMENTATION

2.6 HEDGE EFFECTIVENESS ASSESSMENT

2.7 THE HYPOTHETICAL DERIVATIVE SIMPLIFICATION

2.8 REBALANCING

2.9 DISCONTINUATION OF HEDGE ACCOUNTING

2.10 OPTIONS AND HEDGE ACCOUNTING

2.11 FORWARDS AND HEDGE ACCOUNTING

Chapter 3. Fair Valuation – Credit and Debit Valuation Adjustments

3.1 FAIR VALUATION – OVERVIEW OF IFRS 13

3.2 CASE STUDY – CREDIT VALUATION ADJUSTMENT OF AN INTEREST RATE SWAP

3.3 OVERNIGHT INDEX SWAP DISCOUNTING

Chapter 4. An Introduction to Derivative Instruments

4.1 FX FORWARDS

4.2 INTEREST RATE SWAPS

4.3 CROSS-CURRENCY SWAPS

4.4 STANDARD (VANILLA) OPTIONS

4.5 EXOTIC OPTIONS

4.6 BARRIER OPTIONS

4.7 RANGE ACCRUALS

Chapter 5. Hedging Foreign Exchange Risk

5.1 TYPES OF FOREIGN EXCHANGE EXPOSURE

5.2 INTRODUCTORY DEFINITIONS

5.3 SUMMARY OF IAS 21 TRANSLATION RATES

5.4 FOREIGN CURRENCY TRANSACTIONS

5.5 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH AN FX FORWARD (FORWARD ELEMENT INCLUDED IN HEDGING RELATIONSHIP)

5.6 CASE STUDY: HEDGING A FORECAST SALE WITH AN FX FORWARD

5.7 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A TUNNEL

5.8 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A PARTICIPATING FORWARD

5.9 CASE STUDY: HEDGING A HIGHLY EXPECTED FOREIGN SALE WITH A KNOCK-IN FORWARD (INTRODUCTION)

5.10 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (SPLITTING ALTERNATIVE)

5.11 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (INSTRUMENT IN ITS ENTIRETY)

5.12 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (REBALANCING APPROACH)

5.13 CASE STUDY: HEDGING A HIGHLY EXPECTED FOREIGN SALE WITH A KIKO FORWARD

5.14 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (PART 1)

5.15 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (DESIGNATION IN ITS ENTIRETY)

5.16 CASE STUDY: HEDGING FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (SPLITTING APPROACH)

5.17 HEDGING ON A GROUP BASIS – THE TREASURY CENTRE CHALLENGE

5.18 HEDGING FORECAST INTRAGROUP TRANSACTIONS

Chapter 6. Hedging Foreign Subsidiaries

6.1 STAND-ALONE VERSUS CONSOLIDATED FINANCIAL STATEMENTS

6.2 THE TRANSLATION PROCESS

6.3 THE TRANSLATION DIFFERENCES ACCOUNT

6.4 SPECIAL ITEMS THAT ARE PART OF A NET INVESTMENT

6.5 EFFECT OF MINORITY INTERESTS ON TRANSLATION DIFFERENCES

6.6 HEDGING NET INVESTMENTS IN FOREIGN OPERATIONS

6.7 CASE STUDY: ACCOUNTING FOR NET INVESTMENTS IN FOREIGN OPERATIONS

6.8 CASE STUDY: NET INVESTMENT HEDGE WITH A FORWARD

6.9 CASE STUDY: NET INVESTMENT HEDGE USING FOREIGN CURRENCY DEBT

6.10 NET INVESTMENT HEDGING WITH CROSS-CURRENCY SWAPS

6.11 CASE STUDY: NET INVESTMENT HEDGE WITH A FLOATING-TO-FLOATING CROSS-CURRENCY SWAP

6.12 CASE STUDY: NET INVESTMENT HEDGE WITH A FIXED-TO-FIXED CROSS-CURRENCY SWAP

6.13 CASE STUDY: HEDGING INTRAGROUP FOREIGN DIVIDENDS

6.14 CASE STUDY: HEDGING FOREIGN SUBSIDIARY EARNINGS

6.15 CASE STUDY: INTEGRAL HEDGING OF AN INVESTMENT IN A FOREIGN OPERATION

Chapter 7. Hedging Interest Rate Risk

7.1 COMMON INTEREST RATE HEDGING STRATEGIES

7.2 SEPARATION OF EMBEDDED DERIVATIVES IN STRUCTURED DEBT INSTRUMENTS

7.3 INTEREST ACCRUALS

7.4 MOST COMMON INTEREST RATE DERIVATIVE INSTRUMENTS

7.5 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH AN INTEREST RATE SWAP

7.6 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH A ZERO-COST COLLAR

7.7 IMPLICATIONS OF INTEREST ACCRUALS AND CREDIT SPREADS

7.8 CASE STUDY: HEDGING A FIXED RATE LIABILITY WITH AN INTEREST RATE SWAP

7.9 CASE STUDY: HEDGING A FUTURE FIXED RATE ISSUANCE WITH AN INTEREST RATE SWAP

7.10 CASE STUDY: HEDGING A FUTURE FLOATING RATE ISSUANCE WITH AN INTEREST RATE SWAP

7.11 CASE STUDY: HEDGING A FIXED RATE LIABILITY WITH A SWAP IN ARREARS

7.12 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH A KIKO COLLAR

Chapter 8. Hedging Foreign Currency Liabilities

8.1 CASE STUDY: HEDGING A FLOATING RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FLOATING PAY-FLOATING CROSS-CURRENCY SWAP

8.2 CASE STUDY: HEDGING A FIXED RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FIXED PAY-FLOATING CROSS-CURRENCY SWAP

8.3 CASE STUDY: HEDGING A FLOATING RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FLOATING PAY-FIXED CROSS-CURRENCY SWAP

8.4 CASE STUDY: HEDGING A FIXED RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FIXED PAY-FIXED CROSS-CURRENCY SWAP

Chapter 9. Hedging Equity Risk

9.1 RECOGNITION OF EQUITY INVESTMENTS IN OTHER COMPANIES

9.2 DEBT VERSUS EQUITY CLASSIFICATION OF OWN INSTRUMENTS

9.3 HYBRID SECURITIES – PREFERENCE SHARES FROM AN ISSUER'S PERSPECTIVE

9.4 CONVERTIBLE BONDS – ISSUER'S PERSPECTIVE

9.5 CONVERTIBLE BONDS – INVESTOR'S PERSPECTIVE

9.6 DERIVATIVES ON OWN EQUITY INSTRUMENTS

9.7 CASE STUDY: ACCOUNTING FOR A STOCK LENDING TRANSACTION

9.8 CASE STUDY: ACCOUNTING FOR A MANDATORY CONVERTIBLE BOND FROM AN ISSUER'S PERSPECTIVE

9.9 CASE STUDY: ACCOUNTING FOR A CONVERTIBLE BOND FROM AN ISSUER'S PERSPECTIVE

9.10 CASE STUDY: HEDGING STEP-UP CALLABLE PERPETUAL PREFERENCE SHARES

9.11 CASE STUDY: BASE INSTRUMENTS LINKED TO DEBT INSTRUMENTS

9.12 CASE STUDY: PARKING SHARES THROUGH A TOTAL RETURN SWAP

9.13 CASE STUDY: HEDGING AN EQUITY INVESTMENT WITH A PUT OPTION

9.14 CASE STUDY: SELLING A FORWARD ON OWN SHARES

Chapter 10. Hedging Stock-Based Compensation Plans

10.1 TYPES AND TERMINOLOGY OF STOCK-BASED COMPENSATION PLANS

10.2 ACCOUNTING FOR EQUITY-BASED COMPENSATION PLANS

10.3 CASE STUDY: ABC'S SHARE-BASED PLANS

10.4 MAIN SOP/SAR HEDGING STRATEGIES

10.5 CASE STUDY: HEDGING A STOCK OPTION PLAN WITH AN EQUITY SWAP

10.6 CASE STUDY: HEDGING AN SAR PLAN WITH A CALL

Chapter 11. Hedging Commodity Risk

11.1 MAIN COMMODITY UNDERLYINGS

11.2 LEASE, DERIVATIVE AND OWN-USE CONTRACTS

11.3 CATEGORISATION ACCORDING TO SETTLEMENT TERMS

11.4 CASE STUDY: HEDGING GOLD PRODUCTION WITH A FORWARD – OWN-USE APPLICATION

11.5 CASE STUDY: RAISING FINANCING THROUGH A GOLD LOAN

11.6 CASE STUDY: HEDGING A SILVER PURCHASE FIRM COMMITMENT WITH A FORWARD – FAIR VALUE HEDGE

11.7 CASE STUDY: HEDGING COMMODITY INVENTORY WITH FUTURES

11.8 CASE STUDY: HEDGING A HIGHLY EXPECTED PURCHASE OF OIL WITH FUTURES AND AN FX FORWARD – CASH FLOW HEDGE

11.9 CASE STUDY: AIRLINE JET FUEL CONSUMPTION HEDGE WITH JET FUEL AND CRUDE OIL – RISK COMPONENT

Chapter 12. Hedging Inflation Risk

12.1 INFLATION MARKETS – MAIN PARTICIPANTS AND INDICES

12.2 INFLATION-LINKED BONDS

12.3 INFLATION DERIVATIVES

12.4 INFLATION RISK UNDER IFRS 9

12.5 CASE STUDY: HEDGING REVENUES LINKED TO INFLATION

12.6 MATCHING AN INFLATION-LINKED ASSET WITH A FLOATING RATE LIABILITY

Chapter 13. Hedge Accounting: A Double-Edged Sword

13.1 POSITIVE INFLUENCE ON THE PROFIT OR LOSS STATEMENT

13.2 SUBSTANTIAL OPERATIONAL RESOURCES

13.3 LIMITED ACCESS TO HEDGING ALTERNATIVES

13.4 RISK OF REASSESSMENT OF HIGHLY PROBABLE TRANSACTIONS

13.5 LOW COMPATIBILITY WITH PORTFOLIO HEDGING

13.6 FINAL REMARKS

WILEY END USER LICENSE AGREEMENT

Отрывок из книги

The main goal of IFRS is to safeguard investors by achieving uniformity and transparency in the accounting principles. One of the main challenging aspects of the IFRS rules is the accounting treatment of derivatives and its link with risk management. Whilst it takes years to master the interaction between IFRS 9 (the main guidance on derivatives accounting) and the risk management of market risks using derivatives, this book accelerates the learning process by covering real-life hedging situations, step-by-step. Because each market risk – foreign exchange, interest rates, inflation, equity and commodities- has its own accounting and risk management peculiarities, I have covered each separately to address their particular issues.

Banks have developed increasingly sophisticated derivatives that have increased the gap between derivatives for which there is a consensus about how to apply IFRS 9 and derivatives for which their accounting is unclear. This gap will remain as long as the resources devoted to financial innovation hugely exceed those devoted to accounting interpretation. The objective of this book is to provide a conceptual framework based on an extensive use of cases so that readers can come up with their own accounting interpretation of any hedging strategy.

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It was mentioned earlier that some assets and liabilities are measured at amortised cost. The amortisation is calculated using the effective interest rate (EIR). This rate is applied to the carrying amount at each reporting date to determine the interest expense for the period. The EIR is the rate that exactly discounts the stream of principal and interest cash flows to the initial net outlay (in the case of assets) or proceeds (in the case of a liability). In this way, the contractual interest expense in each period is adjusted to amortise any premium, discount or transaction costs over the life of the instrument.

The carrying amount of an instrument accounted for at amortised cost is computed as:

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