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ISDA. International Swaps and Derivatives Association, Inc. ISDA Workshop – The practical implications of the new accounting rules. 8 November 2004. Overview of current position of IFRS. Significant differences between current UK GAAP and IFRS

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isda workshop the practical implications of the new accounting rules

ISDA

International Swaps and Derivatives Association, Inc.

ISDA Workshop – The practical implications of the new accounting rules

8 November 2004

overview of current position of ifrs
Overview of current position of IFRS
  • Significant differences between current UK GAAP and IFRS
  • Accounting for financial instruments under IFRS is rules based, UK GAAP is principles based
  • Adopted IFRS mandatory for all listed EU companies in their consolidated accounts after 1 January 2005
  • Extension of IFRS to non-consolidated accounts varies by country
  • EU adopted IAS 39 will differ from that issued by the IASB. Certain “carve outs” have been proposed by the ARC
  • Changes still being proposed to IAS 39 with four Exposure Drafts issued since January 2004
slide3

IFRS – Key standards for financial instruments accounting

IAS 39: - Recognition and measurement of financial assets and liabilities;

- Treatment of certain other non-financial items eg, commodity contracts;

- Derecognition of financial assets and liabilities

IAS 32: - Presentation of financial instruments from the perspective of the issuer;

- Provides detailed rules covering netting;

- Requires disclosures to enable a user to understand significance of financial instruments to an entity’s financial position

SIC 12: -Consolidation of Special Purpose Entities

IFRS 4: - Insurance contracts

IAS 37: - Provisions, contingent liabilities and contingent assets

the measurement categories
The measurement categories
  • IAS 39 includes an option to designate ANY financial instrument at fair value at inception
  • Detailed guidance also provided on separating embedded derivatives from host contracts
hedge accounting key steps to achieving a qualifying hedge
Hedge Accounting - Key steps to achieving a qualifying hedge
  • Identify the type of hedge – fair value or cash flow or net investment
  • Identify the hedged item or transaction
  • Identify the nature of the risk being hedged
  • Identify the hedging instrument
  • Demonstrate that the hedge has and will continue to be highly effective
  • Document the hedging relationship above, including the risk management objectives and strategy for undertaking the hedge
  • Monitor effectiveness
fair value measurement
Fair Value measurement
  • Defined as:

“The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction”

  • It is not the amount that an entity would receive or pay in a forced transaction or distressed sale
  • Active markets – defined as those where quoted prices are readily available and representative of actual, regular market transactions. Financial Instrument valued using quoted price
  • No active market – models that are commonly used by the market are considered appropriate for valuing financial instruments
presentation netting debt v equity
Presentation – Netting & debt v equity
  • Financial liability – a contractual obligation to deliver cash or another financial asset to an entity
  • Equity instrument – a contract that evidences a residual interest in the assets of an entity
  • Some instruments have both a liability and equity component – eg convertible bonds. The fair value of the liability should be classified in the liability section of the balance sheet and the “plug” in equity
  • Ownership by an entity of its own shares is never an asset of that entity
  • Complex rules for derivatives on own shares
  • Financial assets and liabilities may only be offset in the balance sheet when there is both:

- a legal, enforceable right of set-off; and- an intention to exercise the right or settle simultaneously

consolidation and derecognition
Consolidation and Derecognition

Consolidation Principles (SIC 12)

  • An enterprise should consolidate enterprises it controls
  • Control of SPEs is determined by considering factors outlined in SIC 12

Derecognition Principles (IAS 39)

  • Applied to transferor’s consolidated group, including SPEs if consolidated
  • Mixed model, based on both risks and rewards and control. Revised standard based on a decision tree:
    • Has there been a transfer or pass-through of cash flows?
    • Has there been a substantial change in the exposure to the risks and rewards?
    • Has there been a transfer of control (as evidenced by transferee’s ability to sell assets)?
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