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12C. Derivatives & Hedge accounting - Coggle Diagram
12C. Derivatives & Hedge accounting
Derivatives:
Examples: future, forwards, swaps, otions.
Definition:
Requires little or no initial investment
Will be settled at a future date
Its value changes in response to the value changes in the item
Contract
Can be settled net in cash or exchanged with another financial instrument
To guarantee a fixed price (not purpose of receipt/delivery of the item)
to buy or sell a non financial item: inventory, PPE, equipment
Accounting treatment
Initially: FV (priced paid) & transaction costs expensed in SPL
Subsequently: remeasured at fV at each reporting date
Measured at FV through SPL
Gains / losses on remeasurement go to SPL
Initially nothing & record gain/loss at ye in SPL
Problem:
Measured at FV through SPL
It introduces volatility into SPL
Hedge accounting
Used to manage risks such as changes in FV or derivatives in cash flow
Hedge instrument to protect an Hedged item against a Hedged risk
Optional set of rules which could be used to reduce/eliminate volatility in SPL
Shows movement in hedged instrument AND hedged item
Gain / loss go to SPL (default)
If item revalued through FVOCI then Gain/loss goes to OCI
Hedge accounting rules overide accounting rules
Disclosure
of financial instruments to enable users to evaluate:
the significance of financial instruments for the entity's position & performance
nature & extent of risks arising from financial instruments and how these are managed