By Graeme Tosen
Graeme Tosen, the chief for technical accounting at HBOS Treasury prone in London, has written a step by step advisor to knowing and enforcing the hugely technical accounting ideas of the foreign monetary Reporting criteria (IFRS) that follow to derivatives and dependent finance.
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Extra resources for A Practical Guide to IFRS for Derivatives and Structured Finance
Background to the accounting rules Hedge accounting is a complex part of accounting. This chapter will attempt to concentrate on the basics, while trying to highlight major issues that could, if managed incorrectly, cause the income statement to be highly volatile. The main purpose of hedge accounting is to eliminate reported or accounting volatility. It should therefore be emphasised that in many respects a company would not be allowed to undertake hedge accounting, but that does not mean that they are not allowed to hedge risks.
In such a case the fair value is estimated using a valuation technique. Any difference will be an expense unless it qualifies as another asset. Is there a difference between ‘more than insignificant’ and ‘significant’? This is a term that is undefined in the accounting rules. It implies that the standard setters ran out of words when they used this term – looking for something that falls somewhere between insignificant and significant. It does, however, suggest that the rule would be interpreted more, rather than less, conservatively.
Linked reference • Whether or not a host contract is equity or debt is dealt with in Chapter 11, pp. 106–117. Measurement issues If a derivative has to be separated but the entity is unable to measure it separately, then the entire contract will be classified as designated at fair value through profit or loss. This would be the case for example where the derivative is settled by an unquoted equity instrument, the fair value of which cannot be reliably measured. Linked reference • The accounting for this was discussed in Chapter 2, pp.