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.

JUAN RAMIREZ works in one of the Big 4 accounting firms. He addresses challenging hedging situations and assessing the accounting treatment of complex transactions with a particular accounting, tax and regulatory capital angle. Formerly, he worked at Arthur Andersen, JP Morgan, Lehman Brothers, Barclays Capital, Banco Santander and BNP Paribas.

Whilst IFRS 9 is set to replace IAS 39, practitioners need to adjust their accounting policies and hedging strategies to conform to the new standard. Filled with expert guidance and practical advice, the Second Edition of Accounting for Derivatives is the resource that covers IFRS 9 specifically for the derivatives practitioner.

The Second Edition of Accounting for Derivatives explains the accounting implications of a proposed transaction on derivatives strategy that is in alignment with the IFRS 9 standards. This important resource contains the author's insights gained from working with numerous companies to minimise the earnings volatility impact of hedging with derivatives.

Thoroughly revised and updated, the second edition to this landmark book incorporates the changes to the new IFRS 9 standards which were put in place to safeguard investors by achieving uniformity and transparency in the accounting principles. This vital resource contains a number of new concepts related to derivatives including new hedge effectiveness assessment requirements, rebalancing and hedge ratio determination, a wider eligibility of hedged items, and a special treatment for options, forwards and cross currency swaps. The author has also included a range of fresh cases that reflect updates to the commodities and equity risk management. Three completely new chapters provide a summary of IFRS 13 Fair Value Measurement with a special emphasis on credit/debit valuation adjustment, (CVA/DVA), addresses hedging of share-based compensation plans, and the third new chapter covers inflation risk.

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. Accounting for Derivatives can help bridge the divide, providing comprehensive IFRS coverage from a practical perspective.

Professional accountants, corporate treasurers, bank financial engineers, derivative salespersons at investment banks and credit/equity analysts will find Accounting for Derivatives to be an invaluable resource for understanding and applying the principles of IFRS 9.

Zusammenfassung

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

Preface xxi

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 11

1.3 Examples of Accounting for Fixed Rate Bonds 14

1.4 Accounting Categories For Financial Liabilities 16

1.5 The Fair Value Option 19

1.6 Hybrid And Compound Contracts 19

Chapter 2 The Theoretical Framework - Hedge Accounting 23

2.1 Hedge Accounting - Types of Hedges 23

2.2 Types of Hedges 25

2.3 Hedged I…