FAR - Financial Instruments Flashcards Preview

FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) > FAR - Financial Instruments > Flashcards

Flashcards in FAR - Financial Instruments Deck (13):
1

What is concentration of credit risk?

Concentration of credit risk = Risk on contracts with third parties within same industry or region that do not perform their part of the contract.

Other words, it's where a third party does not pay back or provide a service to the company as listed in the contract between the company and third party.

2

What is market risk?

Market risk = loss from changes in market value (market price) on a certain asset due to economic changes.

3

US GAAP and IFRS rules in disclosure

Market risk

US GAAP: encourages but NOT requires companies to disclose market risk of financial instruments

IFRS REQUIRES disclosure on everything with a company's financial instruments'
1) Credit risk
2) Liquidity risk
3) Market risk

4

Definition of Derivative (financial derivative)

and what are its 3 charachteristics

Derivative = financial instrument that derives value from another financial instruments.

3 Characteristics:
1) Has an underling and notional amount.
Underlying = specific price, rate, or variable
Notional amount = Unit measure like number of shares, or in dollars, yen, or pounds.
2) NOT require net initial investment
3) Net settlements involving
a) cash payment
b) Settled outside the contract (e.g. on an exchange)
c) Deliver asset

5

4 common types of Financial Derivatives and what are they.

Derivatives - 4 common types:

1) Options: used in stock trading. It's a contract to buy or sell a stock at this price when the price goes up or down.
Call option = buy stock at this price goes up
Put option = sell stock at this price when stock price goes down.

2) Future contracts: two parties exchange COMMODITY or CURRENCY at a future price. This is done via clearing house using standardized notional amounts and settlement dates.
a) Long position = agrees to buy at this price
b) Short position = agrees to sell at this price
1 party does a long position and other party does short position at a same time.

3) Forward contract: Private contract between two parties to exchange at this price. This done though an intermediary. Does not involve clearing house or has standardized notional amounts or settlement dates.

4) Swap contracts: Private agreement between two parties via intermediary (not clearing house) to exchange cash payment.
Examples: Interest rate swaps, currency swaps, equity swaps, and commodity swaps.

6

Reporting Gain or Loss on Derivative:

Instrument is not a hedge, how to report gain or loss on this one?

Gain or losses on "non-hedge" derviatves are reported to

Current income (income statement) >> Current Earnings (income statement) >> Net income >> Retained Retainings

7

Reporting Gain or Loss on Derivative:

Instrument is a F.V. hedge, how to report gain or loss on this one?

Report gains or losses from changes in fair value (market value)

to Current income (current earnings) on Income statement

This in turn goes to the Retained Earnings (an account on the balance sheet)

8

Reporting Gain or Loss on Derivative:

Instrument is a Cash flow Hedge (CFLO hedge), how to report gain or loss on this one?

Gain or losses on ineffective portion >> Current income (current earnings) on Income statement

Gain or losses on Effective portion >> reported as deferred on Income statement and it's reported on OCI (other comprehensive income)

9

CFLO hedges' effective portion gets reported to OCI.

But, it goes from OCI to Earnings / Net income (Income statement) when it impacts

what types of forecasted transactions?

1) Hedged forecast sale or expense >> Gain or loss in AOCI is re-classified to Earnings (net income) when sale or expense is recognized in earnings

2) Hedged forecast purchase inventory: Gain or loss in AOCI is re-classified to earning when selling inventory to customers

3) Hedged forecast fixed asset purchased: Gain or loss in AOCI is re-classified to earnings when depreciating the fix asset.

4) Hedge existing asset or liability: Gain or loss in AOCI is reclassified to earnings when Asset or liability impacts earnings (net income)

10

What is foreign currency hedge?

A hedge against future losses on foreign currency exchanges.

11

What is the accounting treatment for

Foreign currency fair value hedge?

Foreign currency fair value hedge: Report gains or losses in earnings (net income to retained earnings)

12

What is the accounting treatment for

Foreign currency cash flow (CFLO) hedge?

Foreign currency cash flow (CFLO) hedge:

Reports gains / losses on ineffective portion to Current income (current earnings in Income statement)

Report gains / losses on effective portion to OCI (other comprehensive income)

13

What is the accounting treatment for

Foreign currency net investment hedge?

Foreign currency net investment hedge:

Reports to OCI (other comprehensive income) as this account category

Currency translation adjustment for Effective portions in OCI (other comprehensive income)

and

for Ineffective portion going to Current income (current earnings) on Income statement

Decks in FAR CPA Review - (Becker, Roger, Wiley CPA Excel, NINJA) Class (61):