Underlying principles
Mixed attribute model
Derivatives
Hedge accounting
Impairment of loans
Underlying Principles
Financial instruments & derivatives are assets & liabilities
Fair value is most relevant measure for financial instruments, and is the only relevant measure for derivatives
Deferred losses are not assets
Deferred gains are not liabilities
Special accounting only for qualifying items
Financial assets
Available for sale (AFS)
Financial liabilities
Measure at fair value (changes in P&L)
Measure at amortised cost
Measure at fair value (changes in equity)
Measure at fair value (changes in P&L)
Amortised cost
• Fair value:
> Is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction
• Best evidence:
> Quoted market price in active market
• No quote:
> Estimation techniques (similar instruments, DCF, option pricing models)
Derivatives should be recognised
Derivatives should be measured at fair value
cost is nil
are often highly leveraged
Derivatives embedded in other assets or liabilities should be separated
Interest rate
Security price (equity, debt)
Commodity price
Foreign exchange rate
Credit rating
Scope exclusions:
Separate an embedded derivative if:
Use fair value, with changes to P&L
Need for hedge accounting
Existing requirements
Types of hedge:
Hedge of the exposure to changes in the fair value of a recognized asset or liability
Example
Gain/loss on hedging instrument to net income
Gain/loss on hedged instrument attributable to hedged risk to net income AND adjust carrying amount of hedged item
Hedge of exposure to variability in cash flows
Example
Effective portion of gain/loss on hedging instrument recognised initially in equity
Subsequently, that amount is included in net income in the same period or periods during which the hedged item affects net income.