By Graeme Tosen
Graeme Tosen, the executive for technical accounting at HBOS Treasury prone in London, has written a step by step consultant to realizing and enforcing the hugely technical accounting principles of the overseas monetary Reporting criteria (IFRS) that follow to derivatives and dependent finance.
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Additional resources for A Practical Guide to IFRS for Derivatives and Structured Finance
Measurement issues If a derivative has to be separated but the entity is unable to measure it separately, then the entire contract will be classified as designated at fair value through profit or loss. This would be the case for example where the derivative is settled by an unquoted equity instrument, the fair value of which cannot be reliably measured. Linked reference • The accounting for this was discussed in Chapter 2, pp. 5–25. Non-options derivatives A non-option derivative is separated using either its stated or implied substantive terms, so that it has a zero value at initial recognition.
If an entity is planning on designating a derivative and a hedged item/exposure retrospectively (historically fixing the hedge). – The hedging criteria (p. 41). – Frequently asked questions (pp. 46–47). Background to the accounting rules Hedge accounting is a complex part of accounting. This chapter will attempt to concentrate on the basics, while trying to highlight major issues that could, if managed incorrectly, cause the income statement to be highly volatile. The main purpose of hedge accounting is to eliminate reported or accounting volatility.
The prepayment option need only be separated if the exercise price will be materially different from the amortised cost of the debt host at the exercise date. Therefore, in order to get the same effect but with a different accounting treatment, an entity could agree initially to a longer maturity debt contract (extension already factored in at the beginning) and only have the option to terminate early. This will provide the same economic position but no separation would be required. AG 33; and Implementation Guidance Section C 34 Chapter 4 Hedge accounting Introduction This chapter deals with hedge accounting (the elimination of income statement volatility), rather than economic hedging (the actual mitigation of exposure to different kinds of risk).
A Practical Guide to IFRS for Derivatives and Structured Finance by Graeme Tosen