Flashcards in Section 5 - Financial Instruments and Derivatives Deck (12):
What are financial instruments?
COD (smells fishy)
2) Ownership interests in an entity (ie stock)
3) Derivative contracts that create a right and obligation to transfer other financial instruments (ie stock options)
Three reasons entities acquire DERIVATIVES
What is a HEDGE?
The use of a derivative to reduce or eliminate risk that the entity is subject to either as a result of an asset or liability.
Are derivatives an asset or liability?
Both - can be assets or liability
Are derivatives reported at fair value?
How are derivatives UNREALIZED gains and losses recognized in income?
-CASH FLOW HEDGES are temporarily recognized in other "comprehensive income" on B/S
-FAIR VALUE HEDGES are recognized in income (I/S)
What are the three characteristics derivatives must have?
1) No net investment
2) an Underlying and a Notional amount
3) net Settlement
What is a derivative UNDERLYING and NOTIONAL amount?
-Underlying is the factor that affects the derivative's value (specified price, interest rate, exchange rate)
-Notional amount is the number of units (units, bushels, pounds)
What is Cash Flow Hedge?
-acquired to hedge against a FORECASTED FUTURE TRANSACTION
-gain or loss in other comprehensive income (OCI) (B/S)
-nothing included in net income until forecasted activity occurs
What is Fair Value Hedge?
-acquired to hedge against a recognized asset or liability or a firm purchase agreement
-gain or loss in income from continuing operations (I/S)
-should be offset by gain or loss on hedged item
How are compounded financial instruments treated under IFRS?
They are treated as a single instrument that is either accounted for at FVTPL or at amortized cost. Otherwise bifurcation is required.