Accounting for Financial Instruments Set 4

• Transferred asset continues to be recognised to the extent of continuing involvement
• Extent of the entity's continuting involvement in the transferred asset is the extent to which it is exposed to changes in the value of the transferred asset
• Example of recognition
  • transferor gives guarantee
  • transferee keeps variable purchase price reduction
  • sale of 90% of receivables and subordination of the remaining part of the transferor in favour of the transferee

• Securities that result from the measurement and securitisation of one or more portfolios of financial assets (receivables)
• Objective of securitising entity is reducing the strain on the balance sheet by transferring securities to a special purpose entity (SPE)
• Further objectives
  • improving liquidity situation
  • improving financing conditions
  • developing new financial markets

• Important characterisitics
  • security repurchase agreements
    • in reutrn for payments securities are transferred to another party
    • retransfer obligation or retransfer right
  • securities lending agreements
    • transfer of securities with the obligation of retransfer of securities (merely) in same constitution, quality and quantity

• Pension provider keeps the control of the transferred securities
• Securities still recognised az pension provider
• Pension provider keeps current profit as well
• Accounting like a secured borrowing
• Transferred securties are collaterals that have no special accounting rules

• Risks and rewards
  • risk position of pension provider depends on exercising probability of the put option of the recipient
  • put option of the recipient of the pension is deep in the money than the related substantial risks and rewards are retained
  • put option of the recipient of a pension is deep out of the money, than the related substantial risks and rewards are transferred
  • put option of the recipient of a pension is neither deep in the money nor deep out of the money than the related substantial risks and rewards are neither retained nor transferred
  • financial asset is available at market at any time - derecognition is possible, because entity has not retained control
  • financial asset is not available at market at any time - derecogntion is not completely possible, because entity has retained control
• Control
  • Exercising probability is neither high nor low
  • pension provider has lost the control, if the recipient of the pension has the ability to sale the transferred securities (e.g. there is an active market)
• Continuing involvement
  • exercising probability is neither high nor low
  • pension provider keeps control
  • recognition at pension provider with an amount of the continuing involvement (amount of the put option)

• Risks and rewards
  • accounting treatment analogue to genuine pension transaction
  • security lending agreement that provides cash deposit from the borrower to be accounted as secured loan transaction

• Hedging
  • Offsetting an open position at risk by entering into an equal and opposite position
• Hedge accounting
  • Recognition of offsetting effects of changes in fair values or cash flows of
    • hedging item and
    • hedging instrument
  • in financial statements
• Objective of hedge accounting
  • Simultaneous and identical presentation of hedged item and hedging instrument
  • Elimination of impact on profit or loss

• As hedged items may qualify
  • assets
  • liabilities
  • firm commitments
  • highly probable forecast transactions
  • net investment in a foreign operation
  • or groups of those items
• Held to maturity investments cannot be a hedged item with respect to interest rate or repayment risk

• Qualifying hedging instruments are
  • derivatives or
  • for a hedge of a foreign currency risk non-derivative financial asset of non-derivative financial liabilities
• Proportion of entire hedging instrument may be designated as hedging instrument in a hedging relationship
• Written options do in general not qualify as hedging instrument

• Transaction based hedging, i.e. hedging of a single risk with a single hedging instrument
• Hedging more than one risk with a single hedging instrument (e.g. currency and interest rate risk)
• Hedging a single risk with a combination of hedging instruments
• Hedging of portions of risks

• Macro hedges with exception of portfolio hedges of interest rate risk
• Hedging of internal transactions
• Hedging of groups of assets, liabilities, firm commitments or highly probable forecast transactions with unequal risk exposure

• Fair value hedge
  • Hedge of (portion of) financial asets/ liabilities and firm commitments against a particular market risk
  • Main intent of application - debt instruments with fixed rates, i.e. fair value hedge is linked to asset with fixed interest rate
• Cash flow hedge
  • Hedge of future, risk carrying cash flows and anticipated transactions
  • Main intent of application - debt instruments with variable interest rate, i.e. cash flow hedge is linked to liability with variable interest rate

• Upon designation of hedging relationship documentation of
  • hedging relationship
  • hedging objectives and
  • hedging strategies
• Documentation to include identification of
  • hedging instrument
  • hedged item or underlying transaction
  • risk to be hedged
• If forecast transaction is to be hedged, evidence of high probability and of related variations in cash flows

• Measurability of hedge effectiveness
• Expectation of high effectiveness at inception of hedging relationship in conjunction with IAS 39
• Assessment of effectiveness during hedging relationship (effectiveeness range of 80& to 125%)
• Continuous assessment of hedge effectiveness (at least quarterly)

• No method for assessing hedge effectiveness specified in IAS 39
• Adopted method to be
  • appropriate
  • used in a consistent way for similar hedges and
  • documented
• Effectiveness always to be measured between external hedging instrument and hedged item
• Evidence of effectiveness to be provided on period-by-period or cumulative basis over full term of hedging relationship
• If critical terms of hedged item and hedging instrument match exactly, then prospective hedge effectiveness can be assumed
  • notional and principal amount
  • term
  • repricing dates
  • dates of interest and principal receipts and payments
  • basis of measuring interest rates
• There is no exeption from requirement to demonstrate retrospective effectiveness (no short cut methods)

• Hedge accounting to be discontinued if
  • Hedge no longer meets criteria for hedge accounting
  • Hedging instrument expires or is sold, terminated or exercised
  • forecast transaction is no longer expected
  • designation is revoked
• Replacement or roll over of a hedging instrument possible

• Separate measurement of hedged item and edging instrument with recognition of measurement effects
  • of hedged item according to rules for relevant category
  • hedging instrument in profit or loss

• Hedging balance sheet line items and firm commitments or identifiable components therof against possible fair value changes with effect on profit or loss resulting from a specific risk
  • hedging fixed interest rate loans against risk resulting from change of market interest rate
  • hedging future obligations to deliver resources against change in resource prices (price changing risk)

• Hedged item
  • adjustment of carrying amount by fair value changes attributable to hedged risk (hedge adjustment)
  • immediate recognition of these fair value changes in profit or loss
  • -> deivatin from general accouting principles for hedged instruments
• Hedging instrument
  • immediate recogntion of fair value changes in profit or loss
  • -> in accordance with general accounting principles for derivatives

• Hedging of cash flows of recognised assets or liabilities and forecasted transactions against potential variability in cash flows that could affect profit or loss and result from a specific risk
  • swap to convert a variable interest-bearing financial asset or a variable interest-bearing financial liability to a fixed interest rate financial asset or fixed interest rate financial liability
  • hedging of foreign currency risk of a highly probable purchase commitment with a fixed price in foreign currency

• Hedging of  a forecast transaction requires that the transaction is highly probable
• No hedged item if forecast transaction cannot be sufficiently specified
• Possible changes in timing of a hedged forecast transaction do not affect originally designated hedging relationship if effectiveeness does not change
• In assessing likelihood that a transaction will occur, an entity should consider the following circumstances
  • frequuency of similar past transactions
  • financial and operational situation of entity which may prevent to carry out the transaction
  • substantial commitments of resources to a particular activity
  • extentof loss or disruption of operations that could result if the transaction does not occur
  • existence of transactions with substantially different characterisitics that might be used to achieve the same bsuiness purpose
  • entity's business plan

• Hedged itme
  • no adjustemtn of carrying amounts/recognition of adjustemnts of financial assets classified as available-for-sale directly in equity
  • -> in accordance with general accounting principles for hedged items
• Hedging instrument
  • all changes attributable to effective portion of hedge to be recognised directly in revaluation reserve
  • reclassification of gains and losses recognised directly in equity into profit or loss in period in which hedged transaction affects profit or loss (at latest upon termination of hedging relationship)
  • -> deviation from general accounting principles for derivatives
• If the hedged item is a forecast transaction that results in assets or liabilities, gains or losses attributable to hedging instrument that were recognised directly in equity are treated as follows
  • financial assets or financial liabilities
    • reclassification into proit or loss in same period in which hedged item affects profit or loss
  • non-financial asset or non-finanacial liability
    • same treatment as for financial assets/liabilities or inclusion in initial carrying amount of non-financial asset or liability

siehe Bild

• At beginning of hedge relationship
  • Step 1: determination of net exposure
  • Step 2: designation of hedged items in maturity ranges
  • Step 3: designation of hedged risk
  • Step 4: designation of hedging instruments
  • Step 5: prospective effectiveness test
• At date of next effectiveness test
  • Step 6: determination of additions and disposals
  • Step 7: test of effectiveness (retorspectively)
  • Step 8: journal entries
  • Step 9: termination of hedge relationship
  • Step 10: new designation and start with step 1