A Practical Guide to IFRS for Derivatives and Structured by Graeme Tosen

By Graeme Tosen

Graeme Tosen, the chief for technical accounting at HBOS Treasury prone in London, has written a step by step consultant to realizing and imposing the hugely technical accounting ideas of the foreign monetary Reporting criteria (IFRS) that follow to derivatives and established finance.

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Embedded call option that allows the issuer to reacquire The equity instrument. the equity instrument (from the holder’s perspective). Not closely related and therefore separate. An option or provision to extend the maturity term without an adjustment to the current market rate (or approximately this rate) of the instrument at the time of the extension – see also ‘Example 4’ below. The relevant debt contract. Not closely related and therefore separate. Equity index-linked interest or principal payments by which interest or principal is linked to the value (and movement in this value) of equity instruments.

Definitions Before we look at the main issues, it is useful to note certain definitions from IAS 39 and IAS 21. 9) A firm commitment is a binding agreement for the exchange of a specified quantity of resources at a specified price on a specified future date or dates. 9) A forecast transaction is an uncommitted but anticipated future transaction. 9) A hedging instrument is a designated derivative or (for a hedge of the risk of changes in foreign currency exchange rates only) a designated non-derivative financial asset or non-derivative financial liability whose fair value or cash flows are expected to offset changes in the fair value or cash flows of a designated hedged item.

2 Common hedge relationships Hedging instrument Hedged item One to one Hedging a group (macro hedge) indiv rule applies Combination of hedging instruments 70% Designate portion of total FV of instrument Hedging only specific risk One instrument hedging more than one risk with instrument split for effec. test par 76 and IG Source: Authorʼs own 40 Hedge accounting The hedging criteria These are the set of rules that you must be able to tick off before you are allowed to do hedge accounting. After identifying the item/risks that you want to hedge account for, and developing an idea of the appropriate hedging instrument to use, the next logical step is to look at the hedging criteria in order to decide whether or not you qualify for hedge accounting.

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