by R. Venkata Subramani on October 24, 2011
Counterparty credit risk (CVA) is the risk that the counterparty to a financial contract will default prior to the expiration of the contract and will not make all the payments required by the contract. Obviously exchange-traded derivatives are not subject to counterparty risk as the respective exchange guarantees the settlement of cash flows as per the derivative contract. CVA is a measure that adjusts the risk-free value of an instrument to incorporate counterparty credit risk. CVA can be positive or negative depending on which of the two counterparties is most likely to default and the relative balances due or receivable to each other. There were some concerns expressed in certain quarters as to whether the Debit Value Adjustment (DVA) should be considered in determining the fair value. Now based on the recent exposure draft announced jointly by IASB and FASB on 28th January 2011 on Offsetting Financial Assets and Financial Liabilities it is amply clear that the DVA also should be recognized along with CVA.
by R. Venkata Subramani on August 22, 2010
Exchange differences on monetary items
•Exchange differences arise from:
–the settlement of monetary items at a subsequent date to initial recognition, and
–remeasuring an entity’s monetary items at rates different from those at which they were initially recorded (either during the reporting period or at the previous reporting periods)
•Such exchange differences must be recognised as income or expenses in the period in which they arise
Exchange differences on monetary items
If the transaction is settled in a different accounting period to that of the initial recognition of the transaction, the exchange difference to be recognised in each period is determined by the change in exchange rates during that period
Non-monetary items –P&L
- When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is also recognised in profit or loss
- Example: Property is carried at cost. When there is an impairment, the impairment loss is written off to P&L. If the property is held in foreign currency, then the exchange component of the loss is alsorecognised in profit & loss
Non-monetary items -OCI
- When a gain or loss on a non-monetary item is recognised directly in other comprehensive income, any exchange component of that gain or loss is recognised directly in other comprehensive income
- For example gain or loss on AFS equity securities is recognised in other comprehensive income. The exchange component is also recognised in other comprehensive income
Other comprehensive income
- Other IFRSs require some gains and losses to be recognised in other comprehensive income
- For example, IAS 16 requires some gains and losses arising on a revaluation of property, plant and equipment to be recognised in other comprehensive income
- When such an asset is measured in a foreign currency, the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognised in other comprehensive income
Exception to the rule
- There is one exception to this rule given by paragraph 32 of IAS 21
- Exchange differences are recognised directly in other comprehensive income in the consolidated financial statements, if they arise on a monetary item that forms part of a reporting entity’s net investment in a foreign operation denominated in the functional currency of either the parent or the foreign operation
- In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment
Exception to the rule -Example
- An example of this may be a long-term loan to the foreign operation without a repayment term, where management confirms that repayment is neither planned nor likely in the future
You can view the presentation here:
by R. Venkata Subramani on July 8, 2010
At inception formal designation and documentation of
- Hedging relationship
- Entity’s risk management objective
- Strategy for undertaking the hedge
- Identification of hedging instrument
- Identification of hedged item
- Nature of risk being hedged
- Method of assessing the hedge instrument’s effectiveness
by R. Venkata Subramani on July 7, 2010
| Name |
R. Venkata Subramani |
| Firm |
Calypso Technology |
| Designation |
Principal Product Manager |
| Area of specialization |
Hedge Accounting, Accounting |
|
Hedge Accounting, IFRS, US GAAP |
| Contact number |
+919444025255 |
| Address |
Chennai |
|
India |
| Email ID |
venkat@accountingforinvestments.com |
by R. Venkata Subramani on July 5, 2010
A financial liability is any liability that is:
- a contractual obligation :
- (i) to deliver cash or another financial asset to another entity; or
- (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
- a contract that will or may be settled in the entity’s own equity instruments and is: (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
As an exception, an instrument that meets the definition of a financial liability is classified as an equity instrument if it has all the features and meets the conditions in paragraphs 16A and 16B or paragraphs 16C and 16D.
