Accounting Essay

5566 Words Oct 20th, 2014 23 Pages
Chapter 10 Accounting for Derivatives and Hedge Accounting IFRS 9 defines a derivative as a financial instrument or other contract within the scope of IFRS 9 that meets three criteria: 1. Its value changes in response to a change in an "underlying". The underlying can be the price of a commodity, such as soybeans, or a financial instrument, such as a fixed rate bond. It can also be a rate such as a foreign exchange rate or a specified interest rate, for example, the London Interbank Offer Rate; It requires little or no initial net investment; and It is settled at a future date.

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Chapter 10

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TABLE 10.1 Examples of derivative instruments and their underlying Type of derivative instruments
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Current forward rate is the forward rate for the remaining period to maturity (also known as the “market forward rate”). r = discount rate t = period to maturity
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Illustration 10.1 Fair value of a forward contract On 1 March 20x5, Company A entered into a forward contract with a foreign exchange dealer to buy one million foreign currency (FC) units (FC 1,000,000) for delivery on 30 May 20x5. The following exchange rates are given: Date 1 March 20x5 31 March 20x5 30 April 20x5 30 May 20x5 Spot rate $/FC $1.185 1.19 1.20 1.215 30 May forward rate $/FC $1.20 1.21 1.205 1.215 annum) discount rate. The changes in the fair Discount factor (d) $0 1.00835 1.004167 1.0 Fair value of forward contract [(b-a) x c]/d $0 9,917 4,979 15,000

The fair value of the forward contract is calculated using a 5% (per value of the forward purchase contract are as follows: Contracted Current forward rate forward rate Notional (a) (b) amount Date FC 1= FC 1 = (c) 1 March 20x5 $1.20 $1.20 $1,000,000 31 March 20x5 1.20 1.21 1,000,000 30 April 20x5 1.20 1.205 1,000,000 30 May 20x5 1.20 1.215 1,000,000 The following points should be noted:
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Change in fair value $0 9,917 (4,938) 10,021

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