Accounting for Derivatives: Advanced Hedging under IFRS (The Wiley Finance Series)

Accounting for Derivatives......Page 5
Contents......Page 9
Preface......Page 15
1.1 Accounting Categories for Financial Assets and Liabilities......Page 17
1.1.1 Financial Assets Categories......Page 18
1.1.2 Financial Assets Recognition......Page 19
1.1.4 The Fair Value Option......Page 20
1.2 The Amortised Cost Calculation: The Effective Interest Rate......Page 21
1.3.1 Derivative Definition......Page 22
1.3.2 Hedge Accounting......Page 23
1.3.5 Fair-value Hedge......Page 24
1.3.6 Cash Flow Hedge......Page 25
1.3.8 Embedded Derivatives......Page 27
1.4 Hedging Relationship Termination Events......Page 29
1.5 Hedged Item Candidates......Page 30
1.6 Hedging Instrument Candidates......Page 32
1.7 Hedging Relationship Documentation......Page 33
1.8.1 Prospective test......Page 34
1.8.2 Restrospective Test......Page 35
1.8.3 Restrospective Test Failure......Page 36
1.9.2 The Ratio Analysis or Dollar-Offset Method......Page 37
1.9.3 The Regression Analysis Method......Page 38
1.9.4 The Scenario Analysis Method......Page 40
1.9.5 The Volatility Risk Reduction Method (VRR)......Page 41
1.9.7 Concluding Remarks......Page 42
1.11 Effects of Derivatives in the P&L Statement......Page 43
2.1.1 Product Description......Page 45
2.1.2 IAS 39 Accounting Implications......Page 46
2.2.1 Product Description......Page 48
2.3.1 Product Description......Page 49
2.4.1 Product Description......Page 52
2.4.2 Standard Foreign Exchange Options......Page 53
2.4.3 Interest Rate Options – Caps, Floors and Collars......Page 56
2.4.4 IAS 39 Accounting Implications of Options – Intrinsic versus Time Value......Page 59
2.4.5 IAS 39 Accounting Implications of Options – Written Options......Page 61
2.6 Barrier Options......Page 62
2.6.1 Knock-Out Barrier Options – Product Description......Page 63
2.7 Range Accruals......Page 64
3.2.1 Functional Currency......Page 67
3.3.1 Monetary versus Non-Monetary Items......Page 68
3.4 Foreign Currency Transactions......Page 69
3.4.1 Summary of Most Popular Hedging Derivatives – Foreign Exchange Risk......Page 70
Case 3.1 Hedging a Highly Expected Foreign Sale with a Forward......Page 71
Case 3.2 Hedging a Highly Expected Foreign Sale with a Tunnel......Page 84
Case 3.3 Hedging a Highly Expected Foreign Sale with a Participating Forward......Page 92
Case 3.4 Hedging a Highly Expected Foreign Sale with a Knock-in Forward......Page 103
Case 3.5 Hedging a Highly Expected Foreign Sale with a KIKO Forward......Page 115
Case 3.6 Hedging a Highly Expected Foreign Sale with a Range Accrual Forward......Page 127
Case 3.7 The Treasury Centre Challenge......Page 138
Case 3.8 Hedging Forecast Intragroup Transactions......Page 143
4.1.1 Subsidiary Financial Statements......Page 145
4.1.3 Consolidated Financial Statements......Page 146
4.2.1 Basic Procedures before Translation......Page 147
4.3 The Translation Differences Account......Page 148
4.4.2 Special Monetary Items......Page 149
4.6.1 Net Investment Hedge Issuing Foreign Currency Debt......Page 150
Case 4.1 Hedging Intragroup Foreign Dividends......Page 151
Case 4.2 Hedging Foreign Subsidiary Earnings......Page 161
Case 4.3 Accounting for Net Investments in Foreign Operations......Page 168
Case 4.4 Net Investment Hedge using a Forward......Page 170
Case 4.5 Net Investment Hedge using a Cross-Currency Swap......Page 178
Case 4.6 Net Investment Hedge using Foreign Currency Debt......Page 185
Case 4.7 Integral Hedging of an Investment in a Foreign Operation......Page 190
5.1 Common Interest Rate Hedging Strategies......Page 199
5.2 Separation of Embedded Derivatives in Structured Bonds......Page 200
5.3.1 Hedging a Debt Instrument in Its Entirety......Page 202
5.3.2 Hedging Only the Euribor Part of the Debt Instrument......Page 204
5.5 Interest Accruals......Page 205
5.7 Interest Rate Risk Macrohedging......Page 206
5.8 Inflation-linked Bonds and Swaps......Page 207
5.10 Step-Up/Step-Down Provisions......Page 208
Case 5.1 Hedging a Floating-Rate Liability Using an Interest Rate Swap......Page 209
5.11.1 Hedging Relationship Documentation......Page 283
5.11.2 Journal Entries......Page 286
Case 5.2 Hedging a Floating-Rate Liability Using a Zero-Cost Collar......Page 216
Case 5.3 Calculations Implications of Interest Accruals......Page 226
Case 5.4 Hedging a Fixed-rate Liability with an Interest Rate Swap......Page 231
Case 5.5 Hedging a Future Fixed-rate Bond Issuance with a Swap......Page 245
Case 5.6 Hedging a Future Floating-rate Bond Issuance with a Swap......Page 255
Case 5.7 Hedging a Fixed-Rate Liability with a Swap In-Arrears......Page 266
Case 5.8 Hedging a Floating-Rate Liability with a European KIKO Collar......Page 279
Case 6.1 Hedging a Floating-rate Foreign Currency Liability Using a Receive-Floating Pay-Floating Cross-Currency Swap......Page 293
Case 6.2 Hedging a Fixed-rate Foreign Currency Liability Using a Receive-Fixed Pay-Fixed Cross-Currency Swap......Page 315
Case 6.3 Hedging a Fixed-rate Foreign Currency Liability Using a Receive-Fixed Pay-Floating Cross-Currency Swap......Page 329
Case 6.4 Hedging a Floating-rate Foreign Currency Liability Using a Receive-Floating Pay-Fixed Cross-Currency Swap......Page 347
7.1 Recognition of Equity Investments in Other Companies......Page 363
7.2 Debt versus Equity Classification of Own Instruments......Page 364
7.2.2 Recognition As Equity......Page 365
7.3.2 Economic Compulsion......Page 366
7.4.1 Convertible Bonds Denominated in the Entity’s Functional Currency......Page 367
7.5 Derivatives on Own Equity Instruments......Page 368
Case 7.1 Accounting for a Stock Lending Transaction......Page 369
Case 7.2 Measurement of a Mandatory Convertible Bond......Page 374
Case 7.3 Measurement of a Convertible Bond......Page 377
Case 7.4 Hedging Step-up Perpetual Callable Preference Shares......Page 379
Case 7.5 Base Instruments Linked to Debt Instruments......Page 385
Case 7.6 Hedging an Available-for-sale Investment with a Put Option......Page 386
Case 7.7 Parking Shares Through a Total Return Swap......Page 391
Case 7.8 Hedging an Equity-Settled Options Plan with an Equity Swap......Page 396
8.1 Own-use Versus IAS 39 Commodity Contracts......Page 407
Case 8.1 Hedging a Commodity Firm Commitment with a Forward......Page 408
Case 8.2 Hedging a Commodity Inventory with Futures......Page 413
Case 8.3 Hedging a Highly Expected Purchase with Futures......Page 419
9.1 Positive Influence on the Profit and Loss Statement......Page 427
9.2 Substantial Resources Requirements......Page 428
9.3 Limited Access to Hedging Alternatives......Page 429
9.5 Risk of Restatements......Page 430
9.6 Low Compatibility with Portfolio Hedging......Page 431
9.7 Limited Solutions to Basis Risk......Page 432
9.8 Final Remarks......Page 433
References......Page 435
Index......Page 437