Accounting For Financial Instruments

Duration of Course: Three-day Programme

Course Overview

By far the most complex and controversial accounting standards ever to be issued are IAS 39 and FASB 133., Although many companies and banks may find these standards difficult to implement, it is nevertheless important that  derivative practitioners become fully conversant with their requirements, implementation and more importantly, potential weaknesses with the standards. This course is designed to give practitioners a good grounding on the fundamental of financial instruments, derivatives, how they are valued and more importantly, how they should appear on the financial statements. Hedge accounting, including macro and micro strategies will be discussed in detail.  In November 2009, the International Financial Reporting Standards (IFRS) committee introduced IFRS 9, designed to replace IAS 39 and to deal with the controversial issue of when assets should be shown on the balance sheet at fair value. New rules were also introduced on Impairment accounting and 'off balance sheet' treatment. These latest developments will be covered on the seminar.

Practical Emphasis

Our  course is designed  to deal with your specific questions about FASB 133 and IAS 39. We equip you with the practical tools to analyse and understand various transactions. Our courses are very interactive where delegates can share their experiences with other delegates. At the end of the course you will have a firm understanding of the most popular financial instruments and how they impact on your risk strategies. 

Our experience is that most delegates want a thorough understanding rather than a precursory overview of the standard. We rely on practical examples and case studies to ensure that, by the end of the course, you are fully competent to understand and implement hedging strategies. 

Who Should Attend

Profile of Trainer

Cormac Butler is currently an active equity and options trader and a former consultant with Lombard Risk Systems London and has also worked with Peat Marwick and PricewaterhouseCoopers. He has considerable international experience as a training consultant in derivative accounting, Corporate Finance and Derivative Mathematics, working with major banks including Banque BNP Paribas. He has conducted in-house courses Morgan Stanley, PriceWaterhouseCoopers (Holland), Investec (South Africa) and ABB Switzerland and Asian Development Bank. In addition, he has worked for IIR and Euromoney in Singapore, Hong Kong, Thailand, America and Saudi Arabia. Cormac graduated from the University of Limerick, Ireland with a degree in Finance He has recently published Mastering Value at Risk (Financial Times Pitman) which is currently on the best sellers list (for Risk Management books) with Amazon.com, Gloriamundi.org and Financial World Bookshop (London). He has also published Accounting for Financial Instruments by Wiley.

Course Overview

Background and Structure of Company Accounts

Overview of Financial Instrument Accounting Standards

  • Why were the standards devised?
  • Off Balance Sheet Abuse and their consequences
  • How FASB and IAS intend to cope with these abuses
  • How do Accounting Standards contribute to hedging
  • Market &Treasury vs. Accounting Risk

 

Why are Financial Instruments necessary

  • Cross Currency Swaps
  • Interest Rate Swaps
  • Swaptions
  • Options
  • Bond Futures
  • Index Swaps

Accounting for Future and Forward Contracts

  • Initial and Variation Margin
  • Differentiate and understand the distinction between Futures and Forwards contracts
  • Identify problems affiliated with using futures for hedging
  • Tick Points
  • Basis Risk
International Financial Reporting Standard 9
 
  • Changes to Available for Sale category
  • Fair value v Accruals Accounting
  • New Impairment
  • Impact on hedge accounting.
 

Development of Accounting Standards

  • FASB vs. International Accounting Standards
  • Understanding the distinction between hedge and trade accounting
  • Learning how to apply marking to market principles
  • Analyzing the role of the Statement of Total Gains and Realized Losses
Fair Value & Cash Flow Hedge Accounting
  • Identifying ineffectiveness
  • Splitting a hedge between effectiveness and ineffectiveness
  • Excluding spot forward differential
  • Addressing documentation issues
Embedded Derivatives and Structured Products
  • Breaking down contracts between vanilla bonds and derivatives
  • Interest rate exposure
  • Regular way vs. derivative transactions
  • Guidance on when to break down structured instruments
How do Traders Price Derivatives
  • Using market data to price derivatives
  • Learning the basics about spot and forward rates of interest
  • Present value and future value
  • Pricing derivatives on the basis of hedge costs
 
Dealing with Structured Products, Exotic and Credit Derivatives
  • Development of Market
  • Marking to market products
  • Hedge vs. Trade Accounting
  • Use of the OCI/STRGL accounts
Market and Credit Risk Management Techniques
  • Measuring market risk and credit risk on a portfolio basis
  • Volatility - as measured by Value at Risk
  • Hedging exposures as opposed to hedging assets and liabilities
  • Portfolio risk hedging vs. Accounting risk hedging - understanding the issues
Documentation Processes that qualify for Hedge Accounting
  • Effective hedging
  • Matters to appear in documentation
  • Regression analysis
  • Testing for effectiveness -- 80% / 125% rule
FASB and  Securitization
  • Benefits off securitization
  • Determining the difficulty from hedging with plain vanilla swaps
  • Understanding the use of tailor made amortizing swaps
  • Constructing amortization swaps from plain vanilla swaps
  • Present value basis point calculations
Dealing with Credit Risk
  • Measuring Credit Risk
  • Basel Committee on methods to measure credit risk
  • Credit Derivatives
  • Total Return Swaps and Credit Default Swaps
  • How the Accounting Standards Deal with Credit Derivatives

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