Accounting For Derivative Instruments

The international focus of this course is what makes it so valuable. It looks at the implications of the IFRS framework for the recording and reporting of derivatives and financial instruments. The course also provides an understanding of the risks of the different products and how they feed into the accounting and valuation process.

Course Highlights

Equip yourself with the skills and information to master:

The impact of all recent and impending changes to IFRS, including the new IFRS 9 and convergence with US GAAP

The implications of the IFRS framework principles for the recording and reporting of derivatives and other financial instruments

the pricing and risk characteristics of each of the main derivatives product groups, and how they feed through into the accounting and valuation processes

Core accounting procedures for all standard derivatives types, ranging from the basic ‘building-block’ products such as FRAs and FX forwards, to swaps, futures and options

Processes and issues associated with the hierarchy of valuation methods, including fair value, mark-to-market, and the construction of valuation models for illiquid derivatives and their underlying components

The theory and practice of hedge accounting

Presentation and disclosure of risks and risk management policies associated with derivatives activity

For details of the course trainer, please download the course brochure

Booking Information

Dates	Prices	Book This Course	Discount
20 - 22 Oct 2010	£ 2099		-
04 - 06 Apr 2011	£ 2099		-

Course Programme

DAY ONE

KEY IFRS PRINCIPLES AND CONCEPTS

The central objective of accounting: supporting a wide range of economic decisions about the future
Fair value versus historic cost
The importance of the 'Reliable measurement' principle
Reporting risk 'as seen through the eyes of management'

OVERVIEW OF THE KEY STANDARDS: IAS 32, IAS39 AND IFRS7

Definitions of financial instruments and derivatives
Scoping issues including:

Financial guarantees
Derivatives on non-financial underlyings
Undrawn commitments
The distinction between equity and debt

CLASSIFICATION AND MEASUREMENT: 1 – BASED ON UNAMENDED IAS 39

The four categories of assets
The two categories of liabilities
Embedded derivatives: identification and accounting treatment
Permitted and forbidden classifications and transfers
Amortised cost/effective interest rate method of accounting for income and expense

CLASSIFICATION AND MEASUREMENT: 2 – BASED ON NEW IFRS 39

This session will be devoted to a detailed study of such parts of the proposed new IFRS 9 as have been published (either in final form or as exposure drafts) as at the date of the course. Details of the content will be made available on enquiry, nearer to the start-date of the course itself.

DAY TWO

DERIVATIVES PRODUCTS: THE BASICS

The three criteria for treatment as a derivative under IFRS:

The underlying
Low/no initial investment: leverage
Future settlement

The two families of derivatives products:

Linear products (forwards, futures, FRAs and swaps)
Nonlinear products (options)

Valuation principles:

Replication in the cash market
Arbitrage-free pricing
The importance of risk

DERIVATIVES IN DETAIL: LINEAR PRODUCTS

Cost-of-carry as the main determinant of the relationship to the underlying
Understanding interest rates:

The term structure
Bootstrapping the zero curve

Why linear derivatives always can be, and usually are, priced as fair bargains with no initial investment
The products in detail:

The FRA as the basic building-block of all interest-rate derivatives
The forward FX contract as the basic building-block of forex derivatives
The swap as a chain of FRAs

Specific pricing and valuation issues including:

Deriving the zero curve for swaps
Forward-start swaps
The imperfect match between FRAs and traded futures

Accounting for linear derivatives:

At inception
On subsequent accounting dates
At derecognition
Special issues, including:

The ban on amortising forward FX points
Double-counting of accrued interest on swaps

DERIVATIVES IN DETAIL: NONLINEAR PRODUCTS

Why options are always unfair bargains requiring initial or deferred investment by the buyer
Understanding the main components of options pricing:

Intrinsic value
Time value

Understanding the components of time value:

Volatility, historical and implied
Interest rates
Why time value is always greatest at-themoney

The principal options products in practice:

FX options
Share options including options on indices and on index futures
Options on interest rate futures and swaps
Commodity options within the scope of IFRS

Accounting for nonlinear derivatives:

At inception
On subsequent accounting dates
At derecognition
Special issues, including:

The ban on amortising option premiums

DAY THREE

HEDGE ACCOUNTING UNDER IFRS (SUBJECT TO CHANGE BY NEW IFRS 9)

Why hedge accounting?

To eliminate accounting mismatches
To provide more reliable and relevant information on performance and risk
To bring external and internal performance measurement into line with each other

Three types of hedge accounting:

Fair value hedge
Cash flow hedge
Hedge of net investment in foreign operation

Some special issues:

Detailed policies and procedures for hedge accounting
Documentation requirements
What is a 'highly probable' future transaction?

HEDGE ACCOUNTING IN PRACTICE (SUBJECT TO CHANGE BY NEW IFRS 9)

Permissible and impermissible instruments and combinations for:

The hedged item
The hedging instruments
Understanding the exceptions

Designing an optimum hedge:

Aligning the risks of hedged item and hedging instrument
Minimising potential ineffectiveness

Accounting for hedges in detail – procedures and pitfalls:

The fair value hedge
The cash flow hedge
The hedge of net investment in foreign operation

MEASUREMENT AND DISCLOSURE ISSUES UNDER IFRS

Current issues in valuation, including:

Determining fair value in illiquid markets
The problem of disappearing benchmarks, e.g. LIBOR
Factoring counterparty risk into the valuation process post-Lehman

Current issues in disclosure, including:

Basic and enhanced disclosures under IFRS 7
How to present risk 'through the eyes of management'

UPDATE ON CURRENT IFRS PROJECTS

IFRS convergence with US GAAP
The simplification project: replacement of IAS 39 with IFRS 9
Advances in fair value methodology
Outstanding issues between IFRS and the EU