financial instruments ifrs 9 - wirc-icai
TRANSCRIPT
Financial Instruments Standards
IFRS 9 IAS 39
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial instruments
Presentation
Recognition and measurement
Financial Instruments Standards
Derecognition
Hedge accounting
Disclosures
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Derivatives Most Financial
Financial Instruments Standards
Derivatives recognized
on the Balance Sheet
Most Financial Assets
measured at
“Fair Value”
Hedge Accounting
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial instruments are defined as any contract that gives rise to:
- financial asset of one entity and
Financial Instruments Standards
Financial Instruments: Scope & Definition
- financial asset of one entity and
- financial liability or equity instrument of another entity.
Scope:
IAS 39 applies to all entities but not to all financialinstruments
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial assets and liabilities
FIN
AN
CIA
L A
SS
ET
S
•Cash;
•Equity instrument of
another entity;F
INA
NC
IAL L
IAB
ILIT
IES
• Contractual obligation
to deliver cash or
another financial
asset or to exchange
EQ
UIT
Y
INS
TR
UM
EN
T
• Contract evidencing
residual interest in
the assets of an entity
after deducting all its
Financial Instruments Standards F
INA
NC
IAL A
SS
ET
S
another entity;
•Contractual right to receive
cash or another financial
asset or to exchange
financial assets or financial
liabilities under potentially
favorable conditions;
•Certain contracts settled in
entity’s own equity. FIN
AN
CIA
L L
IAB
ILIT
IES
asset or to exchange
financial assets or
financial liabilities
under potentially
unfavorable
conditions;
• Certain contracts
settled in entity’s own
equity.
EQ
UIT
Y
INS
TR
UM
EN
T
after deducting all its
liabilities.
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Presentation of Financial Instruments
Financial Instruments Standards
• Presentation sets out principles for –
� Debt v/s Equity;
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
� Compound Financial Instruments;
� Treasury shares;
� Offsetting financial assets and financial liabilities
Presentation: Debt v/s Equity
Financial Instruments Standards
Yes No Part
Is there a contractual obligation that the issuer cannot
avoid?
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
(Para 15 of IAS 32)
� Assess at initial recognition
� Classification continues until disposal
� Determine liability component
� Equity is residual
� No gain or loss
Yes
Liability
No
Equity
Part
Compound instrument
Presentation: Compound Instrument
Financial Instruments Standards
• IStaR Ltd. issues 1000 bonds convertible intoits own shares in 3 years. The bonds areissued at par with a face value of INR 100/-per bond. Interest is payable annually atnominal interest at 6% p.a. Each bond isconvertible at anytime up to maturity in 125equity shares. When bonds are issued the
• PV of the principal 100,000/-payable at the end of 3 yrs (77,200)
PV of the interest 6,000/-payable annually for 3 years (15,186)
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
equity shares. When bonds are issued theprevailing market interest rate for similar debtwithout conversion options is 9% p.a.
• Solution:
Under this approach, the liability element isvalued first, and the difference between theproceeds of the bond issue and the fair valueof the liability is assigned to the equitycomponent. The present value of the liabilitycomponent is calculated using a discount rateof 9%, the market rate for similar bonds withno conversion rights.
3 years (15,186) ------------
Total Liability Component (92,386)
• Proceeds of the Bond 100,000------------
• Equity component (bal. fig) 7,614=======
• Discounting factor @ 9% 1 year 0.917 2 year 0.842 3 year 0.772
Financial Instruments Standards
� Component of hybrid (combined) instrument that includes a non- derivative “host contract” – with
the effect that some of the cash flows of the combined instrument vary in a way similar to a stand
alone derivative.
HOST CONTRACTHOST CONTRACT
Debt
Executory
Contract
Lease
Insurance
Equity
EMBEDDED DERIVATIVE
FX Option Inflation index Commodity index Equity index
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
• Subordinated loan with equity kicker
IStaR bank has granted a 20 year subordinated loan of ` 100 million to a start –up company at 7% which is below the market yield. As per the loan agreement,the borrower company shall issue 1% of its equity shares outstanding on thedate of listing at 70% of the listing price apart from annual payment of interestdate of listing at 70% of the listing price apart from annual payment of interestand repayment of principal. Is the equity kicker an embedded derivative?
Analysis – It is an embedded derivative, because the host contract is a debtinstrument and it is an option based derivative to exercise for 1% of equityshares of the borrower company at a strike price. The option can be valuedbased on current valuation of equity . It should be segregated from the hostcontract.
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Is the Host contract a Financial Asset within the scope of IFRS 9?
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
DO NOT SEPARATE SEPARATE if:
• Economic characteristics not closely related • Separate instrument would meet the definition of derivative• Hybrid instrument not classified as FV through P or L
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Whether an embedded derivative is required to be separated is assessed when the entity first enters into the contract. Subsequent reassessment is prohibited.
Conditions for separation:
Is the contract
Split an
d acco
unt sep
arately
Financial Instruments Standards
Is the contract
carried at fair
value through
profit or loss
Will it be a
derivative if it was
a freestanding?
Is it closely
related to the
host contract
Do not split the embedded derivative
NoNo YesYes NoNo
NoNoYesYes YesYes
Split an
d acco
unt sep
arately
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Question 1
A German company agrees to sell and deliver its produced cars to a car retailer inUzbekistan in two months time. The contract is denominated in USD. USD is thecommonly used currency in Uzbekistan for transactions of this kind since the localcurrency is relatively unstable. Does the contract contain an embedded derivativethat should be separated?
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
currency is relatively unstable. Does the contract contain an embedded derivativethat should be separated?
Question 2
A Norwegian company agrees to sell oil to a company in France. The oil contract isdenominated in Swiss francs (oil contracts are routinely denominated in US dollarsin international commerce). The functional currency of the Norwegian company isNorwegian kroner and that the functional currency of the French company is Euro.Is there an embedded derivative that should be separated ?
Financial Instruments Standards
Solution 1
No. The contract will not contain an embedded derivative that needs to be separatedout under the Standard. This is because (of the assumption that) sales of cars andother durables in Uzbekistan are commonly denominated in USD (as a relatively
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
other durables in Uzbekistan are commonly denominated in USD (as a relativelystable and liquid) due to the country’s own currency being unstable
Solution 2Yes. The Norwegian company regards the supply contract as a host contract inNorwegian kroner with an embedded foreign currency forward to sell Norwegiankroner and purchase Swiss francs. The French company regards the supply contractas a host contract with an embedded foreign currency forward to sell Swiss francsand purchase Euro
Financial Instruments Standards
Question 3
A manufacturer enters into a long-term contract to purchase a specified quantity of acommodity from a supplier. In future periods, the supplier will provide the commodityat the current market price but within a specified range, for example, the purchaseprice may not exceed 120 per unit or fall below 100 per unit. The current market priceat the inception of the contract is 110 per unit. Is there an embedded derivative, which
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
at the inception of the contract is 110 per unit. Is there an embedded derivative, whichwould require separation?
Question 4
Company A issues a debt instrument on which it pays interest indexed to the price ofgold. Is there an embedded derivative that should be separated and accounted for asa derivative?
Financial Instruments Standards
Solution 3
No. From the manufacturer’s perspective, the price limits specified in the purchasecontract can be viewed as a purchased call on the commodity with a strike price of120 per unit (a cap) and a written put on the commodity with a strike price of 100 perunit (a floor). At inception, both the cap and floor on the purchase price are out of the
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
120 per unit (a cap) and a written put on the commodity with a strike price of 100 perunit (a floor). At inception, both the cap and floor on the purchase price are out of themoney. Therefore, they are considered closely related to the host purchase contractand are not separately recognised as embedded derivatives
Solution 4
Yes. According to the Standard, a commodity-indexed interest would not beconsidered closely related to a host debt instrument. Therefore, Company Aseparates the embedded derivative, a forward indexed to the price of gold, from thehost debt instrument and measures the derivative at fair value
Ind AS 109 3 Appendices6 Chapters
Financial Instruments – Ind AS 109Financial Instruments Standards
Defined Terms
Application
Guidance
Amendments to other standards
“If you don’t know where you’re going you’re highly unlikely to get there”
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Chapter 1 Objective
• To establish principles for the financial reporting of
financial assets and financial liabilities
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
financial liabilities
Chapter 2Scope
• Applies to all entities but Not all Financial
Instruments
All financial assets and financial liabilities, including derivatives,
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
All financial assets and financial liabilities, including derivatives,
should be recognised when the entity becomes party to the contractual provisions
of financial instrument
Effective from Guidance on fair value
in other IAS / IFRS
supersededTo set
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Objective
To Define Fair
Value
To set
Framework
for measuring
Fair Vale
Require
Disclosures
HOW? WHEN?IFRS
13
IFRS
9
Fair Value - Definition• the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date
Exit PriceMarket based and not entity
based
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Determine
Asset / Liability (Unit of account)
Non-Financial Asset (Highest and best use)
Principal / Most
advantageous market
Valuation techniques (Fair Value hierarchy)
Stand-alone asset/ liability
Group of assets/ liabilities
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Characteristics
Condition + Location
Restrictions to sell / to transfer
“What gets measured gets
done”
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Principal
Market =With the greatest
volume or activity
done”
When no principal market Most advantageous market
Maximize amount to Minimizes amount
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Maximize amount to
sell asset
Minimizes amount
to transfer liabilities
Consider
Transaction Costs Transport Costs
To set most advantageous market
To set fair value
When it is extinguished
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
DischargedExpiresCancelled
• A securitisation is a transaction that transforms a financial asset(s)into securities
Financial Instruments Standards
• Intent is often to achieve derecognition of the financial assetssecuritized
• Securitised assets often are transferred to a special purpose entity(SPE)
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Part or entire asset?
Rights to cash flows expired? Derecognition
Rights to cash flows transferred?
Consolidation
NO
YES
NO NO
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Pass through arrangement? Continue to recognize
DerecognitionSubstantially all risks and rewards transferred?
Substantially all risks and rewards retained?
Control retained?
Derecognition
NO
YES
NO
NO
NO
YES
YES
YES
Continue to recognize
YES
NO
Financial Assets
FA at Amortised CostFA at Fair Value
through OCIFA at Fair Value through
Profit and Loss
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
FA at Amortised Cost
Fair Value + Transaction Costs
Amortised Cost using EIR
Profit or Loss
through OCI
Fair Value
Fair Value
OCI
FA at Fair Value through Profit and Loss
Fair Value
Fair Value
Initial
Measurement
Subsequent
Measurement
Gain / Loss
Financial Liabilities
FL at Amortised CostFL at Fair Value through
Profit and Loss
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
FL at Amortised Cost
Fair Value + Transaction Costs
Amortised Cost using EIR
Profit or Loss
Profit and Loss
Fair Value
Fair Value
Initial Measurement
Subsequent Measurement
Gain / Loss
DerivativesDerivatives are instruments with all three of the following characteristics
� Value changes in response to changes in specified underlying price/ index (e.g. interest rate, FX rate, share price)
Financial Instruments Standards
� Requires no or little net investment
� Settled at a future date
Examples of derivatives:
� Forward FX contract
� Interest rate swap
� Collar and Caps
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Purchase of Buy USD - Sell INR forward contract (Assume Incremental Borrowing rate @ 6% or alternatively use WACC)
Forward Spot
Forecast purchase $ 10000
1.10.2010 45.6 45.20 6 month
31.12.2010 45.5 45.10 3 month
Financial Instruments Standards
31.3.2011 45.00 0 month
Journal Entries
1.10.2010 Entry with zero amount Discounted Undiscounted
31.12.2010 Unrealized P & L A/c Dr 985.22 -985.22 -1,000
Forward Liability Cr 985.22
31.3.2011 Unrealized P & L A/c Dr 5,014.78 - -6,000
Forward Liability 5,014.78
31.3.2011 Purchases Dr 4,50,000
To Bank 4,50,000
Forward Liability Dr 6,000.00
To Bank 6,000.00 4,56,000
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Initial recognition amount -
Amortised cost =
Principal repayments
-/+
Accumulated interest -
Impairment reduction
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Amortisation is calculated using the effective interest rate method.
The effective interest rate is defined as “the rate that exactly discounts estimated future cash flows through the expected life of the financial instrument or, where appropriate, a
shorter period to the net carrying amount of the financial asset or financial liability”.
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Year No EIR EIR
Interest Prin EMI O/s Interest Prin EMI O/s Txn
Costs
1 50,000 81,899 131,899 418,101 48,106 83,793 131,899 421,207 1,894
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
1 50,000 81,899 131,899 418,101 48,106 83,793 131,899 421,207 1,894
2 41,810 90,089 131,899 328,013 40,124 91,775 131,899 329,432 1,686
3 32,801 99,097 131,899 228,915 31,382 100,517 131,899 228,915 1,424
4 22,892 109,007 131,899 119,908 22,892 109,007 131,899 119,908 0
5 11,991 119,908 131,899 0 11,991 119,908 131,899 0 0
159,494 500,000 154,494 505,000 5000
Financial Instruments Standards
Radia & Raja Ltd. issued a zero coupon bond of par value 100 at 68; maturity 5 years.
Years Cash flows Interest Amortized Cost Journal Entry
Bank A/c Dr 68
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
0 68 68
Bank A/c Dr 68Zero Coupon Bond A/c 68
1 0 5.453 73.4526
2 0 5.89 79.3424
3 0 6.362 85.7045
4 0 6.872 92.5767
5 -100 7.423 100
IRR 8.02%
Financial Instruments Standards
Active Market � Unadjusted published price quotations
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
No Active Market � Valuation techniques (DCF, Black Scholes, etc)
Fair Value at Cost � Unquoted Equity Investments – impairment loss
What’s a Hedge?
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
“Measurement” mismatch (between the hedged item and hedging instrument)
“Recognition” mismatch (between the hedged item and hedging instrument)
Financial Instruments Standards
hedging instrument)
���� Hedged item measured at amortised cost
���� Hedging instrument measured at fair value
hedging instrument)
���� Hedged item not yet recognised in the balance sheet or income statement
���� Hedging instrument measured at fair value
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Risk being hedged is the change in the ‘fair value’ of or identified portion of an asset, liability or unrecognized firm commitment
Hedging instrument –
Financial Instruments Standards
Hedging instrument –
Change in fair value
Hedged item –
Adjust the carrying amount
INCOME
STATEMENT
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Risk being hedged is exposure to variability in ‘cash flows’ of an asset, liability or unrecognized firm commitment
Hedging instrument
Changes in fair value
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Recycled when hedged items affect earnings
Effective Portion -
EQUITY (OCI)
(Cash flow Hedge Reserve)
Ineffective Portion –
INCOME STATEMENT
Hedge relationship must be documented at inception
The criteria for hedge accounting is onerous and have system implications for all
entities. Hedge Accounting is OPTIONAL and management should consider the
cost and benefits to use it.
Financial Instruments Standards
• Risk management objective and strategy for the hedge
• Identification of the hedging instrument
• The related hedged item or transaction
• The nature of the risk being hedged
• How hedging instrument’s effectiveness will be assessed
Hedge must be expected to be highly effective at inception and subsequent periods
• Hedge effectiveness must be tested regularly throughout its life
• Effectiveness must fall within the range of 80% - 125% over the life of the hedge
In the case of hedging future cash flows, there must be a high probability of that cash flow occurring
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Effectiveness Test: Prospective & Retrospective
• IAS 39 does not specify a single method for assessinghedge effectiveness prospectively or retrospectively.
• The method an entity adopts depends on its riskmanagement strategy and should be included in the
Financial Instruments Standards
management strategy and should be included in thedocumentation at the inception of the hedge.
• The most common methods used are:• critical terms comparison;• dollar offset method; and• regression analysis.
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Effectiveness Test: Critical Comparison Test• Comparing the critical terms of the hedging instrument with those of the hedged
item.
• Hedge relationship is expected to be highly effective where all the principal termsof the hedging instrument and the hedged item match exactly – for example,
Financial Instruments Standards
notional and principal amounts, credit risk (AA), term, pricing, re-pricing dates(aligned to test date), timing, quantum and currency of cash flows – and thereare no features (such as optionality) that would invalidate an assumption ofperfect effectiveness.
• Does not require any calculations.
• May only be used in the limited cases, but in such cases it is the simplest way todemonstrate that a hedge is expected to be highly effective (prospectiveeffectiveness testing).
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• The dollar offset method can be performed using different approaches, including the following:
• Hypothetical derivative approach: The hedged risk is modelled as a derivative called a‘hypothetical derivative’ (as it does not exist). The hypothetical derivative approach compares thechange in the fair value or cash flows of the hedging instrument with the change in the fair value orcash flows of the hypothetical derivative.
Financial Instruments Standards
• Benchmark rate approach: ‘target’ rate established for the hedge. In an interest rate hedge of avariable rate debt instrument using an interest rate swap, the benchmark rate is usually the fixedrate of the swap at the inception of the hedge. The benchmark rate approach first identifies thedifference between the actual cash flows of the hedging item and the benchmark rate. It thencompares the change in the amount or value of this difference with the change in the cash flow orfair value of the hedging instrument.
• Sensitivity analysis approach: assess the effectiveness of a hedge prospectively. This methodconsists of measuring the effect of a hypothetical shift in the underlying hedged risk (for example, a10% shift in the foreign currency exchange rate being hedged) on both the hedging instrument andthe hedged item.
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• This statistical method investigates the strength of the statisticalrelationship between the hedged item and the hedging instrument.
• Provides a means of expressing, in a systematic fashion, the extent by
Financial Instruments Standards
• Provides a means of expressing, in a systematic fashion, the extent bywhich one variable, ‘the dependent’, will vary with changes in anothervariable, ‘the independent’.
• The independent variable reflects the change in the value of thehedged item, and the dependent variable reflects the change in thevalue of the hedging instrument.
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• IStaR Bank issues $100m of debt at a fixed interest rate e.g. at 8%. To avoid a mismatch betweenthe interest it pays for funding and the floating interest rate it receives on loans, the bank takes outan interest rate swap. The swap has the affect of IStaR paying a floating rate of interest on theissued debt, say at 11% instead of the 8% fixed (IStaR continues to pay fixed interest to the debtholders, but receives fixed interest from, and pays floating to, the swap counterparty)
Financial Instruments Standards
IStaR assets with $ floating interest rates
IRS - IStaR pay $ floating interest to swap counterparty receives $ fixed
interest from swap
ASSETS LIABILITIES
• Impact on financials:
When the interest on debt increases leading to decrease in the carrying amount of thedebt by $10m. This has equal corresponding effect on notional amount of swap.
IStaR issued debt at a fixed rate @ 8%
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Hedge Accounting Normal Accounting
BALANCE SHEET USD Mio USD Mio
Derivative Asset / (Liability) (13) (13)
Issued Debt (100) (100)
Fair value adjustment to Issued debt (increase) / decrease 10 Nil
Net issued debt Liability (90) (100)
P & L ACCOUNT
Financial Instruments Standards
P & L ACCOUNT
Net Interest Income COUPON (8) (8)
SWAP ACCRUAL (3) 0
NET (11) (8)
Trading Income SWAP MTM (10) (13)
ISSUED DEBT FV ADJUSTMENT 10 NIL
NET PROFIT AND LOSS (11) (21)
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Bank of Paris, has € 1 million of variable-rate demand deposit liabilities (DDL) at January 1 of Year 1. Based on priorexperience, Bank of Paris anticipates these customer accounts will remain outstanding for an average of three years. Thebank wishes to hedge its interest-rate exposure on these accounts by entering into an interest-rate swap. The swap has anotional amount of € 1 million and a term of three years, and net settlement in Euros is required on January 1 of each year,beginning with Year 2. Under the swap, Bank of Paris receives the London Interbank Offered Rate (LIBOR) plus 1% andpays a fixed rate of 4%. Thus, Bank of Paris will have an asset (a liability) position in the swap when the LIBOR plus 1% isgreater than (less than) 4%.
Financial Instruments Standards
greater than (less than) 4%.
Assume the LIBOR rates, plus 1%, over the term of the swap are as follows:
– Year 1 (average and ending) 6%
– Year 2 (average and ending) 3%
– Year 3 (average and ending) 5%
For reporting purposes, Bank of Paris estimates the fair value of swaps by projecting future settlement amounts using thecurrent year’s variable rate and discounting these expected future cash flows for time value using the same variable rate.The relevant present-value interest factors are as follows:
– Present value of an annuity due of € 1 for 3 years at 6% 2.83339
– Present value of an annuity due of € 1 for 2 years at 3% 1.97087
Solution:
Cash flow hedge solution
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Hedge accounting must be discontinued prospectively if:
– The hedging instrument expires or is sold, terminated or exercised
Financial Instruments Standards
exercised
– The hedge no longer meets the IAS 39 criteria for hedge accounting (e.g. forecast transaction no longer highly probable)
– The entity revokes the designation
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
• Objectives
– Improvement of existing requirements as regards exposureand management of risks arising from financial instruments
– Removing unnecessarily onerous or duplicative disclosures
Financial Instruments Standards
– Removing unnecessarily onerous or duplicative disclosures
– Relocating in one place all disclosure requirements onfinancial instruments
• Scope
– All risks arising from financial instruments
– All entities
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Significance of financial
instruments for financial
position and performance
Classes of financial
instruments and level of
disclosure
Nature and extent of
risks arising from
financial instruments
IFRS 7
Financial Instruments Standards
position and performancedisclosure financial instruments
Qualitative
disclosures
Other
disclosures
Income statement and equity
Quantitative
disclosures
Balance
sheet
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Financial Instruments Standards
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)
Presenter’s contact details
CA Pooja Gupta
Financial Instruments Standards
+91 – 9821504041
www.capoojagupta.blogspot.in
I F RS – I n t e r n a t i o n a l F i n a n c i a l R e p o r t i n g S t a n d a r d s