Accounting for Derivatives Training Course

Equip yourself with the skills and information to master:

• Fully up-dated review of current developments, including the impact of the financial crisis, the IASB-FASB convergence process, and the new standards IFRS 9 and IFRS 13 (Fair Value Measurement)
• In-depth study of the key existing ‘baseline’ standards – IAS 32, IAS 39, IFRS 7, including full details of classification, recognition and measurement of Financial Instruments and Derivatives
• 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

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DAY ONE

Initial Overview and Discussion of Key IFRS Principles and Concepts

• The central objective and principles of accounting and how they impact the accounting for financial instruments and derivatives: ‘supporting a wide range of economic decisions about the future’
• Fair value versus historic cost: key issues relating to ‘reliable measurement’ of financial instruments
• Reporting risk 'as seen through the eyes of management'

Overview of the Key ‘Baseline’ Standards: IAS 32, IAS 39, and IFRS 7

• 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 of Financial Instruments and Derivatives: The Detail

• The four categories of assets (now two under IFRS 9)
• The two categories of liabilities
• Embedded derivatives: identification and accounting treatment
• Permitted and forbidden classifications and transfers: the October 2008 revisions
• Making sense of the available alternative treatments
• Implications for unwelcome volatility in reported earnings

Recognition and Measurement

• The underlying rules for the different categories
• Trade date versus settlement date accounting
• The basic rule for derivatives: at fair value on every accounting date
• Exceptions:
  – Derivatives on equities with no observable fair value
  – Derivatives in cash flow hedging relationships
  – Initial and subsequent recognition of financial instruments and derivatives
  – Problems associated with recognition of 'Day One Profit'

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 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 value, Interest rates & why time value is always greatest at-the-money
• 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 non linear derivatives:
  – At inception, on subsequent accounting dates, at derecognition
• Special issues, including:
  – The ban on amortising option premiums

Hedge Accounting Under IFRS

• 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?

DAY THREE

Hedge Accounting In Practice

• 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 and 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 Level 1-3 valuation hierarchy: marking-to-model
  – 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
• IFRS 9 – replacement for IAS 39: the ‘own credit’ controversy
• IFRS 13 and advances in fair value methodology
• Outstanding issues between IFRS and the EU

Benefit from a specially-designed programme, researched and developed in conjunction with leading practitioners and consultants, with international experience. Through a specially integrated format of hands-on workshops, indepth discussions and real-life case studies, your expert course leader will help you master the myriad of standards and regulations under IFRS, as well as all the latest changes to the standards for financial instruments and derivatives, including the new IFRS 9. So take this opportunity to become fully aware of the best methods for handling such areas as:

• Current IFRS accounting practices for futures, FRAs, swaps and options –including their trading and hedging applications
• Key considerations in applied accounting for foreign exchange
• Understanding the relationship between derivatives, risk and your job in accounting for them
• Understanding and accounting for illiquid derivatives for which an open market value is not readily available

Once you have completed this course you will automatically qualify for continued learning credits from the ICAEW and ACCA.