Professional Documents
Culture Documents
Agenda
1.
2.
3.
4.
5.
6.
7.
Session 1
Session 2
Financial Instruments
Financial instrument is formally defined in PSAK 50 while PSAK 55
refers to the same definition as follows:
A financial instrument is any contract that gives rise to
a financial asset of one entity and
a financial liability or equity instrument of another entity.
Financial
instrument
Financial
asset
Financial
liability
of one entity
or
Equity
instrument
of another entity
Financial
instrument
Financial
liability
Edited by Taufik Hidayat
Definition of Derivative
Derivative
Settled at
a future date
Derivative Instruments
Example
Melody Limited makes a five-year fixed rate loan to Tony Inc, while
Tony at the same time makes a five-year variable rate loan for the
same amount to Melody.
There are no transfers of principal at inception of the two loans, since
Melody and Tony have a netting agreement.
Is this a derivative under PSAK 55?
Yes.
This meets the definition of a derivative (that is to say, there is an
underlying variable, no initial net investment or an initial net investment
that is smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in market
factors, and future settlement).
Underlying
Used by
Option contracts
(call and put)
Security price
Forward contracts
e.g. foreign exchange
forward contract
Foreign
exchange rate
Various companies
Future contracts
e.g. commodity futures
Commodity
prices
Producers and
consumers
Interest rate
Financial institutions
Swaps
Types of derivatives
1. Forward type derivatives such as forward contracts,
future contracts and swaps
2. Option-type derivatives such as call and put options,
caps and collars and warrants
3. Free standing derivatives
4. Embedded derivatives
Edited by Taufik Hidayat
Initial Recognition
Initial recognition requirements for financial
assets and financial liabilities in PSAK 55:
An entity is required to recognise a financial
asset or a financial liability on its balance
sheet when, and only when, the entity
becomes a party to the contractual
provisions of the instrument.
In other accounting standards, the
recognition criteria are
1) it is probable that future economic benefits
associated with the item will flow to (or flow out
from) the entity; and
2) the cost of the item can be measured reliably.
Imply settlement
date accounting
Initial Measurement
When a financial asset or financial liability (except for it at
fair value through profit or loss) is recognised initially, an
entity is required to measure it at:
1. its fair value plus
2. its transactions costs that are directly attributable to
the acquisition or issue of the financial asset or
financial liability.
In the case of a financial asset or financial liability that
will be classified as financial asset or financial liability
at fair value through profit or loss (FVTPL),
1. an entity is only required to measure it at its fair value
only
2. its transaction costs should not be recognised.
Derivative FVTPL
Edited by Taufik Hidayat
Subsequent Measurement
Default accounting treatment for derivatives under PSAK 55:
Derivatives are classified under the Fair Value through Profit or Loss
category and changes in their fair values are taken to income
statement
Exception - when a derivative is designated as a hedge of an
identified risk and the hedge is effective. In this case, accounting for
the derivative follows hedge accounting rules.
Forward Contracts
An agreement between two parties (counterparties) whereby one
party agrees to buy and the other party agrees to sell a specified
amount (notional amount) of an item at a fixed price (forward
rate) for delivery at a specified future date (forward date).
Can either be a forward purchase contract or a forward sales
contract, depending on the perspective of the counterparties.
A Company
Sells Forward
Contract
B Company
10
r = discount rate
t = period to maturity
No journal entry
as fair value is nil
Closing position or
at expiration*
Dr Forward Contract
(asset)
Cr Gain on forward
contract
Dr Cash
Cr Forward contract
or
Dr Loss on forward
contract
Cr Forward Contract
(liability)
Dr Forward contract
Cr Cash
* Its also required the journals to adjust fair value and settlement of underlying at expiration.
Edited by Taufik Hidayat
11
Spot rate
$/FC
March 1
$1.185
$1.20
March 31
1.19
1.21
April 30
1.20
1.205
May 30
1.215
1.215
Account
Amount
No Entry
Fair value of forward contract is zero at inception
May 30
10,000
10,000
5,000
10,000
Dr Cash
Cr
Forward Contract
15,000
Dr Foreign Currency
Cr
Cash
1,215,000
5,000
10,000
15,000
1,215,000
1.215 x 1,000,000
When forward contracts fall due more than 12 months after the reporting period, they should be
Edited by Taufik Hidayat
discounted.
12
Account
Amount
No Entry
Fair value of forward contract is zero at inception
May 30
10,000
10,000
5,000
10,000
Dr Foreign Currency
Cr
Cash
Cr
Forward Contract
1,215,000
5,000
10,000
1,200,000
15,000*
Futures Contracts
A future contract is similar to a forward contract except that
it is a standardized contract and is traded on an exchange.
Futures contracts are marked-to-market and settled on a
daily basis.
Futures contracts require payment of a margin deposit
which has to be maintained throughout the contract period.
Margin account is not part of initial investment but as
collateral for counterparty or clearinghouse.
Margin accounts are separate assets and accounted
separately.
Wide range of exchange-traded future contracts:
Commodity futures
Interest rate futures
Currency futures
13
Closing position or
at expiration*
Dr Futures Contract
Cr Gain on future
contract
Dr Cash
Dr Gain on future
contract
Cr Margin deposit
or
Dr Loss on future
contract
Cr Futures Contract
Record payment of
initial margin deposit
Dr Cash
Cr Loss on future
contract
Cr Margin deposit
Close out and and recover
margin deposit
Date
Price/ounce
May 30 futures
price/ounce
March 1
$798
$800
March 31
797
799
April 30
799
801
May 30
802
802
14
Account
80,000
10% x $800,000
May 30
Amount
Dr Margin Deposit
Cr
Cash
80,000
1,000
1,000
Dr Futures Contract
Cr
Gain on Futures Contract
2,000
Dr Cash
Dr Futures Contract
Cr
Gain on Futures Contract
Cr
Margin Deposit
80,000
1,000
Dr Gold
Cr
Cash
Cr
Futures Contract
802,000
2,000
1,000
80,000
800,000
2,000**
Account
80,000
10% x $800,000
May 30
Amount
Dr Margin Deposit
Cr
Cash
80,000
1,000
1,000
Dr Futures Contract
Cr
Gain on Futures Contract
2,000
Dr Futures Contract
Cr
Gain on Futures Contract
1,000
Dr Gold
Cr
Margin deposit
Cr
Cash
Cr
Futures Contract
802,000
2,000
1,000
80,000
720,000
2,000**
15
Hedging
Propose is to neutralize an exposed risk
Loss on hedge item offset by gain on hedging instrument
Reduce volatility than preserve gains
16
Specific risks
that qualify for
hedge accounting
Price risk
Credit risk
17
Hedge effectiveness Changes in fair value or future cash flow of hedging instrument
=
(or delta ratio)
Changes in fair value or future cash flow of hedged item
0.8
1.25
Effective hedge
Classification of Hedging
Fair value
hedge
Cash flow
hedge
Hedge of a net
investment in a
foreign entity
18
Hedging Instruments
Income statement
Gain (loss) on hedging instrument
offset loss (gain) on hedged item
Balance sheet
Change in fair value adjusted
against carrying amount
19
Ilustration:
31/10/20X3
Inventory of 10,000 ounces of gold
Carried at cost of $3,000,000 ($300 per ounce)
Price of gold was $352 per ounce
1/11/20X3
Sold forward contract on 10,000 ounce for forward price of
$350 ounce
Forward contract matures on 31/3/20X4
Spot Rate
Nov 1, 20X3
Date
$352
$350
342
340
330
330
Forward contract .
Cr
100,000
100,000
Dr
Loss on inventory
Cr
Inventory ..
100,000
100,000
20
Forward contract .
Cr
100,000
100,000
Dr
Loss on inventory
Cr
Inventory ..
120,000
120,000
Dr
Cash ..
Cr
Sales .
3,300,000
3,300,000
Cr
Inventory .........................
2,780,000
2,780,000
Dr
Cash ..................
Cr
200,000
200,000
21
Inventory .
Cr
520,000
520,000
Dr
Cash ..................
Cr
Cr
3,500,000
200,000
3,300,000
Effective portion
of gain/ loss
Ineffective portion
of gain/ loss
Recognized directly
in equity through
statement of
changes in equity
Recognized in profit
or loss
22
Ineffective
portion
credited/
(debited)
to income
statement
in current
period**
Period
ending
Cumulative
in FV of
future
contracts
(a)
Cumulative
in PV of
expected
cash flow
(b)
31/1/20x1
$100
$(105)
$100
$100
28/2/20x1
190
(185)
185
85
31/3/20x1
293
(290)
290
105
(2)
30/4/20x1
255
(245)
245
(45)
$0
Other transactions
which affect future
cash flows
23
Ilustration:
1/10/20X1
Inventory of 5,000,000 ounces of silver.
Carried at cost of $15,000,000 ($3 per ounce).
Price of silver was $3.3 per ounce
Sold futures contract on 5,000,000 ounce for $3.21 /ounce.
Futures contract matures on 31/3/20X2.
Required margin deposit was $0.03 per ounce.
Date
Oct 1, 20X1
Spot Price/ounce
$3.30
$3.21
3.265
3.17
3.15
3.05
3.10
3.00
24
Period
ending
Cumulative Cumulative
in FV of
in PV of
future
expected
contracts
cash flow
(a)
(b)
Lesser of
two
cumulative
amount in
absolute
terms
(c)
Effective
portion
credited/
(debited) to
equity in
current
period*
Ineffective
portion
credited/
(debited)
to income
statement
in current
period**
31/12/X1
200,000
(175,000)
175,000
175,000
25,000
28/2/X2
800,000
(750,000)
750,000
575,000
25,000
31/3/X2
1,050,000
(1,000,000)
1,000,000
250,000
25
Dr
Margin deposit
Cr
Cash .................................
150,000
150,000
31/12/20X1
Dr Futures contract ..
200,000
Cr
175,000
Cr
25,000
28/2/20X2
Dr Futures contract ..
600,000
Cr
575,000
Cr
25,000
Cr
250,000
250,000
Dr
Cash ..
Cr
Sales .
15,500,000
15,500,000
Dr
Cr
Inventory .........................
15,000,000
15,000,000
Dr
Cr
1,000,000
1,000,000
26
Cash ..................
Cr
150,000
Cr
1,050,000
1,200,000
Option Contracts
Contract that gives holder the right but not the
obligation to buy or sell a specified item at a
specified price.
2 type of option contracts:
Call option right, but not obligation to buy.
Put option right, but not obligation to sell.
27
Strike price=
Underlying
(spot price)
Strike price>
Underlying
(spot price)
Holder of call
option
Out-of-the-money
At-the-money
In-the-money
Holder of put
option
In-the-money
At-the-money
Out-of-the-money
Time value
Call option = Max [0, Notional amount x (Spot price Strike Price)
Put option = Max [0, Notional amount x (Strike price Spot Price)
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At inception
Dr Option contract
(asset)
Cr Cash
Closing position or
at expiration
Dr Cash*
Cr Gain on option
contract
Cr Option Contract
or
Dr Loss on futures
contract
Cr Option Contract
Dr Cash*
Dr Loss on option
contract
Cr Option Contract
(* assume expires in-the-money. If out-ofthe money, no cash entry is needed)
Record payment of
initial margin deposit
At inception
Dr Cash
Cr Option contract
(liability)
Closing position or
at expiration
Dr Option contract
Cr Gain on Option
Contract
(Expires out-of-the-money)
or
Dr Loss on futures
contract
Cr Option Contract
Dr Option contract
Dr Loss on option
Cr Cash
(Expires in-the-money)
Record payment of
initial margin deposit
29
Option Price
March 1
Date
$38
$4.50
March 31
41
6.80
April 30
43
8.25
Option Price
Intrinsic Value
Time Value
March 1
Date
$4.50
$3
$1.50
March 31
6.80
0.80
April 30
8.25
0.25
Account
450,000
$4.5 x 100,000
450,000
April 30
Amount
Dr Call Option
Cr
Cash
300,000
300,000
(6 3) x 100,000
70,000
70,000
Dr Call Option
Cr
Gain on Option Contract
200,000
(8 6) x 100,000
200,000
55,000
55,000
(0.25 0.8) x 100,000
30
Account
Dr Cash
Cr
Call option
Amount
825,000
825,000
Account
Dr AFS
Dr Loss on Exercise of Option
Cr
Call Option
Cr
Cash
Amount
4,300,000
25,000
825,000
3,500,000
Account
450,000
$4.5 x 100,000
April 30
Amount
Dr Cash
Cr
Call Option
450,000
300,000
300,000
(6 3) x 100,000
70,000
70,000
200,000
(8 6) x 100,000
Dr Call Option
Cr
Gain on Option Contract
To record change in time value
200,000
55,000
55,000
(0.25 0.8) x 100,000
31
Account
Amount
Dr Cash
Dr Call Option
Cr
AFS
Cr
Gain on Exercise of Option
3,500,000
825,000
4,300,000
25,000
Option Price
March 1
Date
$34
$2.50
March 31
32
4.00
April 30
31
4.80
Option Price
Intrinsic Value
Time Value
March 1
Date
$2.50
$1
$1.50
March 31
4.00
1.00
April 30
4.80
0.80
32
Account
250,000
$2.5 x 100,000
250,000
April 30
Amount
Dr Put Option
Cr
Cash
200,000
200,000
(3 1) x 100,000
50,000
50,000
Dr Put Option
Cr
Gain on Option Contract
100,000
(4 3) x 100,000
100,000
20,000
20,000
(0.8 1.0) x 100,000
Account
Dr Cash
Cr
Put option
Amount
480,000
480,000
Account
Dr Cash
Dr Loss on Exercise of Option
Cr
Put Option
Cr
AFS
Amount
3,500,000
80,000
480,000
3,100,000
33
Account
250,000
$2.5 x 100,000
April 30
Amount
Dr Cash
Cr
Put Option
250,000
200,000
200,000
(3 1) x 100,000
50,000
50,000
100,000
(4 3) x 100,000
Dr Put Option
Cr
Gain on Option Contract
To record change in time value
100,000
20,000
20,000
(0.8 1.0) x 100,000
Account
Dr AFS
Dr Put Option
Cr
Cash
Cr
Gain on Exercise of Option
Amount
3,100,000
480,000
3,500,000
80,000
34
Option Price
March 1
Date
$34
$2.50
March 31
32
3.80
April 30
31
4.00
Option Price
March 1
Date
$34
$2.50
March 31
32
3.80
April 30
31
4.00
Option Price
Intrinsic Value
Time Value
March 1
Date
$2.50
$1
$1.50
March 31
3.80
0.80
April 30
4.00
0.00
35
March 1
Account
Amount
Dr AFS
Cr
Cash
3,400,000
$34 x 100,000
Dr Put Option
Cr
Cash
250,000
$2.5 x 100,000
3,400,000
250,000
200,000
(3 1) x 100,000
70,000
70,000
(0.8 1.5) x 100,000
200,000
P/L
200,000
200,000
(32 34) x 100,000
April 30
April 30
April 30
Account
Amount
Dr Loss on Investment
Cr
AFS
100,000
100,000
80,000
80,000
(0 0.8) x 100,000
Dr Put Option
Cr
Gain on Option Contract
100,000
(4 3) x 100,000
Dr Cash
Cr
Put Option
Cr
AFS
3,500,000
100,000
400,000
3,100,000
36
Swap
In a swap, two counterparties agree to a
contractual arrangement wherein they agree to
exchange cash flows at periodic intervals.
2 type of basic swap:
Single Currency Interest rate swap
Plain vanilla fixed-for-floating swaps in one currency.
Cross Currency Interest Rate Swap (Currency swap)
Fixed for fixed rate debt service in two (or more)
currencies.
Swap (2)
Interest Rate Swap:
Used by companies and banks that require either fixed
or floating-rate debt.
Interest rate swaps allow the companies (or banks) and
the swap bank to benefit by swapping fixed-for-floating
interest payments.
Since principal is in the same currency and the same
amount, only interest payments are exchanged (net).
37
Swap (3)
Interest Rate Swap:
Pay floating
Company A
Receive
prefers floating fixed
Swap
Bank
Pay fixed
Receive
Floating
Company B
prefers fixed
Issue floating
Issue fixed
38
LIBOR
LIBOR + 50 bp
June, 30
7.25%
7.75%
Sept, 30
6.25%
6.75%
Dec, 31
7.45%
7.95%
March, 31
7.50%
8.00%
Assumption:
Fair value of swap at inception is zero.
Current floating rate continues to prevail till the end of
the swap tenure.
FV swaps are discounted with LIBOR + 50 bp.
Company A
prefers fixed
Pay
7.75%
Receive
7.75%
Receive
LIBOR +
50 bp
Pay
LIBOR
+ 50 bp
Issue LIBOR +
50 bp
Company B
prefers floating
Issue fixed
Edited by Taufik Hidayat
39
Current
LIBOR
+ 50 bp
Receipt of
previous
LIBOR + 50
bp
(a)
Payment
of 7.75%
(b)
Current
net
receipt
(paid)
(c)
FV of
Swap
asset
(liability)
(d)
Change
in FV
(e)
June, 30
7.75%
Sept, 30
6.75%
193,750
193,750
Dec, 31
7.95%
168,750
193,750 (25,000)
9,710
82,248
March, 31
8.00%
198,750
193,750
5,000
6,127
(3,583)
200,000
193,750
6,250
(6,127)
June, 30
0
0
(72,538) (72,538)
Account
Dr Interest Expense
Cr
Cash
Amount
193,750
193,750
Sept 30
Dr FV adjustment (equity)
Cr
Interest rate swap asset/liability
72,538
72,538
To record fv adjustment
Dec 31
Dr Interest Expense
Cr
Cash
168,750
168,750
Dec 31
Dr Interest Expense
Cr
Cash
25,000
25,000
Dec 31
82,248
82,248
To record fv adjustment
40
Account
Amount
198,750
198,750
March 31 Dr Cash
Cr
Interest Expense
5,000
5,000
3,583
3,583
To record fv adjustment
June 30
Dr Interest Expense
Cr
Cash
200,000
200,000
June 30
Dr Cash
Cr
Interest Expense
6,250
6,250
June 30
Dr FV adjustment (equity)
Cr
Interest rate swap asset/liability
6,127
6,127
To record fv adjustment
Edited by Taufik Hidayat
41
Sources:
Tan & Lee Advanced Financial Accounting.
Lam & Lau Intermediate Financial
Reporting 2nd Ed.
Baker, Christensen, Cottrell Advanced
Financial Accounting 10th Ed.
@Taufik_FEUI
Edited by Taufik Hidayat
42