Professional Documents
Culture Documents
Agend
a
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
Financial
instrument
instrument
Financial
Financial
asset
asset
Financial
Financial
liability
liability
of one entity
or
Equity
Equity
instrument
instrument
of another entity
Financial
Financial
liability
liability
Edited by Taufik Hidayat
Definition of Derivative
Derivative
Value
Valuechange
changebased
based
on
onan
anunderlying
underlying
Little
Littleor
orno
noinitial
initialnet
net
investment
investment
Settled
Settledat
at
aafuture
date
future date
Derivative Instruments
Example
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.
Yes.
This
This meets
meets the
the definition
definition of
of aa derivative
derivative (that
(that isis to
to say,
say, there
there isis an
an
underlying
underlyingvariable,
variable,no
noinitial
initialnet
netinvestment
investmentor
oran
aninitial
initialnet
netinvestment
investment
that
that isis smaller
smaller than
than would
would be
be required
required for
for other
other types
types of
of contracts
contracts that
that
would
would be
be expected
expected to
to have
have aa similar
similar response
response to
to changes
changes inin market
market
factors,
factors,and
andfuture
futuresettlement).
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
Swaps
Interest rate
Financial institutions
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.
Edited by Taufik Hidayat
Imply
Imply trade
trade date
date
accounting
accounting
Imply
Imply settlement
settlement
date
date accounting
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
Derivative
FVTPL
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
Notional x
amount
where
Contracted forward rate is forward rate
fixed at inception
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
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
To close forward contract at maturity
Dr Foreign Currency
Cr
Cash
To record settlement of underlying
5,000
10,000
15,000
15,000
(1.2 - 1.215) x 1,000,000
1,215,000
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.
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
To close forward contract at maturity
5,000
10,000
1,215,000
1,200,000
15,000*
*(1.2 - 1.215) x 1,000,000
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
Edited by Taufik Hidayat
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
Account
Dr Margin Deposit
Cr
Cash
80,000
10% x $800,000
May 30
Amount
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
To record settlement and close futures contract
Edited by Taufik Hidayat
2,000
1,000
80,000
802,000
800,000
2,000**
**(802 - 800) x 100 x 10
Account
Dr Margin Deposit
Cr
Cash
80,000
10% x $800,000
May 30
Amount
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
To close forward contract at maturity
Edited by Taufik Hidayat
2,000
1,000
802,000
80,000
720,000
2,000**
**(802 - 800) x 100 x 10
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.
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)
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 option
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
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 option
contract
Cr Option Contract
Dr Option contract
Dr Loss on option
Cr Cash
(Expires in-the-money)
Record payment of
initial margin deposit
Stock Price
Option Price
March 1
$38
$4.50
March 31
41
6.80
April 30
43
8.25
Date
Option Price
Intrinsic Value
Time Value
March 1
$4.50
$3
$1.50
March 31
6.80
0.80
April 30
8.25
0.25
Account
Dr Call Option
Cr
Cash
450,000
$4.5 x 100,000
450,000
April 30
Amount
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
Account
Dr Cash
Cr
Call option
Amount
825,000
825,000
Account
Dr AFS
Cr
Call Option
Cr
Cash
Amount
4,325,000
825,000
3,500,000
Date
Account
Dr Trading / FVTPL
Dr Profit or Loss
Cr
Call Option
Cr
Cash
To record the exercise and close option contract
Edited by Taufik Hidayat
Amount
4,300,000
25,000
825,000
3,500,000
Account
Dr Cash
Cr
Call Option
450,000
$4.5 x 100,000
April 30
Amount
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
Account
Dr Cash
Dr Call Option
Cr
AFS
Cr
Profit or Loss
To record the exercise and close option contract
Amount
3,500,000
825,000
4,300,000
25,000
Stock Price
Option Price
March 1
$34
$2.50
March 31
32
4.00
April 30
31
4.80
Date
Option Price
Intrinsic Value
Time Value
March 1
$2.50
$1
$1.50
March 31
4.00
1.00
April 30
4.80
0.80
Account
Dr Put Option
Cr
Cash
250,000
$2.5 x 100,000
250,000
April 30
Amount
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
Date
Account
Dr Cash
Dr Profit or Loss
Cr
Put Option
Cr
AFS
To record the exercise and close option contract
Amount
3,500,000
80,000
480,000
3,100,000
Account
Dr Cash
Cr
Put Option
250,000
$2.5 x 100,000
April 30
Amount
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
Amount
3,020,000
480,000
3,500,000
Date
Account
Dr Trading / FVTPL
Dr Put Option
Cr
Cash
Cr
Profit or Loss
To record the exercise and close option contract
Amount
3,100,000
480,000
3,500,000
80,000
Sources
:
Tan & Lee Advanced Financial Accounting.
Lam & Lau Intermediate Financial Reporting,
2nd Ed.
Baker, Christensen, Cottrell Advanced
Financial Accounting, 10th Ed.
Mackenzie, et al Interpretation & Application
of IFRS 2011.
@Taufik_FEUI
Edited by Taufik Hidayat
Hedging
Propose is to neutralize an exposed risk
Loss on hedge item offset by gain on hedging instrument
Reduce volatility than preserve gains
Specific risks
that qualify for
hedge accounting
Price risk
Credit risk
1.25
Effective hedge
Classification of Hedging
Fair value
hedge
Cash flow
hedge
Hedge of a net
investment in a
foreign entity
Hedging Instruments
Balance sheet
Change in fair value adjusted
against carrying amount
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 per ounce
Forward contract matures on 31/3/20X4
Date
Spot Rate
Nov 1, 20X3
$352
$350
342
340
330
330
31/12/20X3
Dr
Forward contract .
Cr
100,000
100,000
Dr
Loss on inventory
Cr
Inventory ..
100,000
100,000
31/3/20X4
Inventory is sold to third-party at $330 per ounce (also maturity date of
forward contract
Dr
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
31/3/20X4
Dr
Cr
Inventory .........................
2,780,000
2,780,000
Dr
Cash ..................
Cr
200,000
200,000
31/3/20X4
If inventory is NOT sold to third-party but SETTLED at maturity date
Dr
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
Lesser of
Effective
two
portion
cumulative credited/
amount in
(debited)
absolute to equity in
terms
current
(c)
period*
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
$0
28/2/20x1
190
(185)
185
85
31/3/20x1
293
(290)
290
105
(2)
30/4/20x1
255
(245)
245
(45)
Other transactions
which affect future
cash flows
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 $3.32
/ounce.
Futures contract matures on 31/3/20X2.
Required
deposit
was $0.03
per
ounce.
DatemarginSpot
Price/ounce
March 31
Futures
Price
Oct 1, 20X1
$3.30
$3.32
3.265
3.29
3.19
3.20
3.10
3.10
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
150,000
(175,000)
150,000
150,000
28/2/X2
600,000
(550,000)
550,000
400,000
50,000
31/3/X2
1,100,000
(1,000,000)
1,000,000
450,000
50,000
1/10/20X1
Dr
Margin deposit
Cr
Cash .................................
150,000
150,000
31/12/20X1
Dr
Futures contract ..
Cr
150,000
150,000
28/2/20X2
Dr
Futures contract ..
450,000
Cr
400,000
Cr
50,000
31/3/20X2
Dr
Futures contract ..
500,000
Cr
450,000
Cr
50,000
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
31/3/20X2
Dr
Cash ..................
1,250,000
Cr
150,000
Cr
1,100,000
Stock Price
Option Price
March 1
$34
$2.50
March 31
32
3.80
April 30
31
4.00
Stock Price
Option Price
March 1
$34
$2.50
March 31
32
3.80
April 30
31
4.00
Date
Option Price
Intrinsic Value
Time Value
March 1
$2.50
$1
$1.50
March 31
3.80
0.80
April 30
4.00
0.00
March 1
Account
Amount
Dr AFS
Cr
Cash
3,400,000
3,400,000
$34 x 100,000
Dr Put Option
Cr
Cash
250,000
$2.5 x 100,000
250,000
200,000
(3 1) x 100,000
70,000
70,000
200,000
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
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).
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
Accounting treatment:
Changes in fair value of swap are taken to equity.
Interest payments are taken to P/L.
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
Issue LIBOR +
50 bp
Pay
7.75%
Receive
7.75%
Receive
LIBOR +
50 bp
Pay
LIBOR
+ 50 bp
Company B
prefers floating
Issue fixed
Edited by Taufik Hidayat
Current Receipt of
LIBOR +
previous
50 bp
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
(a)
(b)
(c)
(d)
(e)
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
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
To record fv adjustment
Edited by Taufik Hidayat
6,127
6,127
Date
1/1X3
30/6X3
31/12X3
30/6/X4
31/12/X4
30/6/X5
LIBOR
4.0%
4.5%
5.0%
4.7%
4.5%
4.3%
LIBOR+150 bp
5.5%
6.0%
6.5%
6.2%
6.0%
5.8%
Sources
:
Tan & Lee Advanced Financial Accounting.
Lam & Lau Intermediate Financial Reporting,
2nd Ed.
Baker, Christensen, Cottrell Advanced
Financial Accounting, 10th Ed.
Mackenzie, et al Interpretation & Application
of IFRS 2011.
@Taufik_FEUI
Edited by Taufik Hidayat