You are previewing Accounting for Derivatives: Advanced Hedging under IFRS 9, 2nd Edition.
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Accounting for Derivatives: Advanced Hedging under IFRS 9, 2nd Edition

Book Description

The derivative practitioner's expert guide to IFRS 9 application

Accounting for Derivatives explains the likely accounting implications of a proposed transaction on derivatives strategy, in alignment with the IFRS 9 standards. Written by a Big Four advisor, this book shares the author's insights from working with companies to minimise the earnings volatility impact of hedging with derivatives. This second edition includes new chapters on hedging inflation risk and stock options, with new cases on special hedging situations including hedging components of commodity risk. This new edition also covers the accounting treatment of special derivatives situations, such as raising financing through commodity-linked loans, derivatives on own shares and convertible bonds. Cases are used extensively throughout the book, simulating a specific hedging strategy from its inception to maturity following a common pattern. Coverage includes instruments such as forwards, swaps, cross-currency swaps, and combinations of standard options, plus more complex derivatives like knock-in forwards, KIKO forwards, range accruals, and swaps in arrears.

Under IFRS, derivatives that do not qualify for hedge accounting may significantly increase earnings volatility. Compliant application of hedge accounting requires expertise across both the standards and markets, with an appropriate balance between derivatives expertise and accounting knowledge. This book helps bridge the divide, providing comprehensive IFRS coverage from a practical perspective.

  • Become familiar with the most common hedging instruments from an IFRS 9 perspective

  • Examine FX risk and hedging of dividends, earnings, and net assets of foreign subsidies

  • Learn new standards surrounding the hedge of commodities, equity, inflation, and foreign and domestic liabilities

  • Challenge the qualification for hedge accounting as the ultimate objective

  • IFRS 9 is set to replace IAS 39, and many practitioners will need to adjust their accounting policies and hedging strategies to conform to the new standard. Accounting for Derivatives is the only book to cover IFRS 9 specifically for the derivatives practitioner, with expert guidance and practical advice.

    Table of Contents

    1. Cover
    2. Title Page
    3. Copyright
    4. Dedication
    5. Preface
      1. CHANGES TO THE PREVIOUS EDITION
    6. Chapter 1: The Theoretical Framework – Recognition of Financial Instruments
      1. 1.1 ACCOUNTING CATEGORIES FOR FINANCIAL ASSETS
      2. 1.2 THE AMORTISED COST CALCULATION: EFFECTIVE INTEREST RATE
      3. 1.3 EXAMPLES OF ACCOUNTING FOR FIXED RATE BONDS
      4. 1.4 ACCOUNTING CATEGORIES FOR FINANCIAL LIABILITIES
      5. 1.5 THE FAIR VALUE OPTION
      6. 1.6 HYBRID AND COMPOUND CONTRACTS
    7. Chapter 2: The Theoretical Framework – Hedge Accounting
      1. 2.1 HEDGE ACCOUNTING – TYPES OF HEDGES
      2. 2.2 TYPES OF HEDGES
      3. 2.3 HEDGED ITEM CANDIDATES
      4. 2.4 HEDGING INSTRUMENT CANDIDATES
      5. 2.5 HEDGING RELATIONSHIP DOCUMENTATION
      6. 2.6 HEDGE EFFECTIVENESS ASSESSMENT
      7. 2.7 THE HYPOTHETICAL DERIVATIVE SIMPLIFICATION
      8. 2.8 REBALANCING
      9. 2.9 DISCONTINUATION OF HEDGE ACCOUNTING
      10. 2.10 OPTIONS AND HEDGE ACCOUNTING
      11. 2.11 FORWARDS AND HEDGE ACCOUNTING
    8. Chapter 3: Fair Valuation – Credit and Debit Valuation Adjustments
      1. 3.1 FAIR VALUATION – OVERVIEW OF IFRS 13
      2. 3.2 CASE STUDY – CREDIT VALUATION ADJUSTMENT OF AN INTEREST RATE SWAP
      3. 3.3 OVERNIGHT INDEX SWAP DISCOUNTING
    9. Chapter 4: An Introduction to Derivative Instruments
      1. 4.1 FX FORWARDS
      2. 4.2 INTEREST RATE SWAPS
      3. 4.3 CROSS-CURRENCY SWAPS
      4. 4.4 STANDARD (VANILLA) OPTIONS
      5. 4.5 EXOTIC OPTIONS
      6. 4.6 BARRIER OPTIONS
      7. 4.7 RANGE ACCRUALS
    10. Chapter 5: Hedging Foreign Exchange Risk
      1. 5.1 TYPES OF FOREIGN EXCHANGE EXPOSURE
      2. 5.2 INTRODUCTORY DEFINITIONS
      3. 5.3 SUMMARY OF IAS 21 TRANSLATION RATES
      4. 5.4 FOREIGN CURRENCY TRANSACTIONS
      5. 5.5 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH AN FX FORWARD (FORWARD ELEMENT INCLUDED IN HEDGING RELATIONSHIP)
      6. 5.6 CASE STUDY: HEDGING A FORECAST SALE WITH AN FX FORWARD
      7. 5.7 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A TUNNEL
      8. 5.8 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A PARTICIPATING FORWARD
      9. 5.9 CASE STUDY: HEDGING A HIGHLY EXPECTED FOREIGN SALE WITH A KNOCK-IN FORWARD (INTRODUCTION)
      10. 5.10 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (SPLITTING ALTERNATIVE)
      11. 5.11 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (INSTRUMENT IN ITS ENTIRETY)
      12. 5.12 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A KNOCK-IN FORWARD (REBALANCING APPROACH)
      13. 5.13 CASE STUDY: HEDGING A HIGHLY EXPECTED FOREIGN SALE WITH A KIKO FORWARD
      14. 5.14 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (PART 1)
      15. 5.15 CASE STUDY: HEDGING A FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (DESIGNATION IN ITS ENTIRETY)
      16. 5.16 CASE STUDY: HEDGING FORECAST SALE AND SUBSEQUENT RECEIVABLE WITH A RANGE ACCRUAL (SPLITTING APPROACH)
      17. 5.17 HEDGING ON A GROUP BASIS – THE TREASURY CENTRE CHALLENGE
      18. 5.18 HEDGING FORECAST INTRAGROUP TRANSACTIONS
    11. Chapter 6: Hedging Foreign Subsidiaries
      1. 6.1 STAND-ALONE VERSUS CONSOLIDATED FINANCIAL STATEMENTS
      2. 6.2 THE TRANSLATION PROCESS
      3. 6.3 THE TRANSLATION DIFFERENCES ACCOUNT
      4. 6.4 SPECIAL ITEMS THAT ARE PART OF A NET INVESTMENT
      5. 6.5 EFFECT OF MINORITY INTERESTS ON TRANSLATION DIFFERENCES
      6. 6.6 HEDGING NET INVESTMENTS IN FOREIGN OPERATIONS
      7. 6.7 CASE STUDY: ACCOUNTING FOR NET INVESTMENTS IN FOREIGN OPERATIONS
      8. 6.8 CASE STUDY: NET INVESTMENT HEDGE WITH A FORWARD
      9. 6.9 CASE STUDY: NET INVESTMENT HEDGE USING FOREIGN CURRENCY DEBT
      10. 6.10 NET INVESTMENT HEDGING WITH CROSS-CURRENCY SWAPS
      11. 6.11 CASE STUDY: NET INVESTMENT HEDGE WITH A FLOATING-TO-FLOATING CROSS-CURRENCY SWAP
      12. 6.12 CASE STUDY: NET INVESTMENT HEDGE WITH A FIXED-TO-FIXED CROSS-CURRENCY SWAP
      13. 6.13 CASE STUDY: HEDGING INTRAGROUP FOREIGN DIVIDENDS
      14. 6.14 CASE STUDY: HEDGING FOREIGN SUBSIDIARY EARNINGS
      15. 6.15 CASE STUDY: INTEGRAL HEDGING OF AN INVESTMENT IN A FOREIGN OPERATION
    12. Chapter 7: Hedging Interest Rate Risk
      1. 7.1 COMMON INTEREST RATE HEDGING STRATEGIES
      2. 7.2 SEPARATION OF EMBEDDED DERIVATIVES IN STRUCTURED DEBT INSTRUMENTS
      3. 7.3 INTEREST ACCRUALS
      4. 7.4 MOST COMMON INTEREST RATE DERIVATIVE INSTRUMENTS
      5. 7.5 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH AN INTEREST RATE SWAP
      6. 7.6 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH A ZERO-COST COLLAR
      7. 7.7 IMPLICATIONS OF INTEREST ACCRUALS AND CREDIT SPREADS
      8. 7.8 CASE STUDY: HEDGING A FIXED RATE LIABILITY WITH AN INTEREST RATE SWAP
      9. 7.9 CASE STUDY: HEDGING A FUTURE FIXED RATE ISSUANCE WITH AN INTEREST RATE SWAP
      10. 7.10 CASE STUDY: HEDGING A FUTURE FLOATING RATE ISSUANCE WITH AN INTEREST RATE SWAP
      11. 7.11 CASE STUDY: HEDGING A FIXED RATE LIABILITY WITH A SWAP IN ARREARS
      12. 7.12 CASE STUDY: HEDGING A FLOATING RATE LIABILITY WITH A KIKO COLLAR
    13. Chapter 8: Hedging Foreign Currency Liabilities
      1. 8.1 CASE STUDY: HEDGING A FLOATING RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FLOATING PAY-FLOATING CROSS-CURRENCY SWAP
      2. 8.2 CASE STUDY: HEDGING A FIXED RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FIXED PAY-FLOATING CROSS-CURRENCY SWAP
      3. 8.3 CASE STUDY: HEDGING A FLOATING RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FLOATING PAY-FIXED CROSS-CURRENCY SWAP
      4. 8.4 CASE STUDY: HEDGING A FIXED RATE FOREIGN CURRENCY LIABILITY WITH A RECEIVE-FIXED PAY-FIXED CROSS-CURRENCY SWAP
    14. Chapter 9: Hedging Equity Risk
      1. 9.1 RECOGNITION OF EQUITY INVESTMENTS IN OTHER COMPANIES
      2. 9.2 DEBT VERSUS EQUITY CLASSIFICATION OF OWN INSTRUMENTS
      3. 9.3 HYBRID SECURITIES – PREFERENCE SHARES FROM AN ISSUER'S PERSPECTIVE
      4. 9.4 CONVERTIBLE BONDS – ISSUER'S PERSPECTIVE
      5. 9.5 CONVERTIBLE BONDS – INVESTOR'S PERSPECTIVE
      6. 9.6 DERIVATIVES ON OWN EQUITY INSTRUMENTS
      7. 9.7 CASE STUDY: ACCOUNTING FOR A STOCK LENDING TRANSACTION
      8. 9.8 CASE STUDY: ACCOUNTING FOR A MANDATORY CONVERTIBLE BOND FROM AN ISSUER'S PERSPECTIVE
      9. 9.9 CASE STUDY: ACCOUNTING FOR A CONVERTIBLE BOND FROM AN ISSUER'S PERSPECTIVE
      10. 9.10 CASE STUDY: HEDGING STEP-UP CALLABLE PERPETUAL PREFERENCE SHARES
      11. 9.11 CASE STUDY: BASE INSTRUMENTS LINKED TO DEBT INSTRUMENTS
      12. 9.12 CASE STUDY: PARKING SHARES THROUGH A TOTAL RETURN SWAP
      13. 9.13 CASE STUDY: HEDGING AN EQUITY INVESTMENT WITH A PUT OPTION
      14. 9.14 CASE STUDY: SELLING A FORWARD ON OWN SHARES
    15. Chapter 10: Hedging Stock-Based Compensation Plans
      1. 10.1 TYPES AND TERMINOLOGY OF STOCK-BASED COMPENSATION PLANS
      2. 10.2 ACCOUNTING FOR EQUITY-BASED COMPENSATION PLANS
      3. 10.3 CASE STUDY: ABC'S SHARE-BASED PLANS
      4. 10.4 MAIN SOP/SAR HEDGING STRATEGIES
      5. 10.5 CASE STUDY: HEDGING A STOCK OPTION PLAN WITH AN EQUITY SWAP
      6. 10.6 CASE STUDY: HEDGING AN SAR PLAN WITH A CALL
    16. Chapter 11: Hedging Commodity Risk
      1. 11.1 MAIN COMMODITY UNDERLYINGS
      2. 11.2 LEASE, DERIVATIVE AND OWN-USE CONTRACTS
      3. 11.3 CATEGORISATION ACCORDING TO SETTLEMENT TERMS
      4. 11.4 CASE STUDY: HEDGING GOLD PRODUCTION WITH A FORWARD – OWN-USE APPLICATION
      5. 11.5 CASE STUDY: RAISING FINANCING THROUGH A GOLD LOAN
      6. 11.6 CASE STUDY: HEDGING A SILVER PURCHASE FIRM COMMITMENT WITH A FORWARD – FAIR VALUE HEDGE
      7. 11.7 CASE STUDY: HEDGING COMMODITY INVENTORY WITH FUTURES
      8. 11.8 CASE STUDY: HEDGING A HIGHLY EXPECTED PURCHASE OF OIL WITH FUTURES AND AN FX FORWARD – CASH FLOW HEDGE
      9. 11.9 CASE STUDY: AIRLINE JET FUEL CONSUMPTION HEDGE WITH JET FUEL AND CRUDE OIL – RISK COMPONENT
    17. Chapter 12: Hedging Inflation Risk
      1. 12.1 INFLATION MARKETS – MAIN PARTICIPANTS AND INDICES
      2. 12.2 INFLATION-LINKED BONDS
      3. 12.3 INFLATION DERIVATIVES
      4. 12.4 INFLATION RISK UNDER IFRS 9
      5. 12.5 CASE STUDY: HEDGING REVENUES LINKED TO INFLATION
      6. 12.6 MATCHING AN INFLATION-LINKED ASSET WITH A FLOATING RATE LIABILITY
    18. Chapter 13: Hedge Accounting: A Double-Edged Sword
      1. 13.1 POSITIVE INFLUENCE ON THE PROFIT OR LOSS STATEMENT
      2. 13.2 SUBSTANTIAL OPERATIONAL RESOURCES
      3. 13.3 LIMITED ACCESS TO HEDGING ALTERNATIVES
      4. 13.4 RISK OF REASSESSMENT OF HIGHLY PROBABLE TRANSACTIONS
      5. 13.5 LOW COMPATIBILITY WITH PORTFOLIO HEDGING
      6. 13.6 FINAL REMARKS
    19. Index
    20. End User License Agreement