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C.CHANDRASEKHAR



 
 
 


March 2009
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= OAS 133 ± US GAAP for derivative accounting

= IORS ± International Oinancial Reporting Standards
--- Over 120 countries, including China and India
are adopting IORS
= Indian Accounting Standards (GAAP) ±
Convergence with IORS:
--- AS 30 ± Recognition and De-recognition of
Oinancial instruments, Measurement of
financial instruments and Hedge Accounting
--- AS 31 ± Presentation
--- AS 32 - Disclosure

  
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= [ categories of financial instruments

= Oair value measurement

= Hedge accounting
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I. A financial asset or liability at fair value

through P&L

= Held for trading

= Includes derivatives not used as a hedge

II. Held to maturity instruments

= Non-derivative financial instruments with fixed

maturity
= The entity has positive intent and ability to
hold to maturity





 



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III. Loans & receivables

= Non-derivative financial assets with fixed or
determinable payments
= Not quoted in the market

IV. Oinancial assets available for sale

= Non-derivative financial assets, so designated, or
= Not classified otherwise

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= Change in fair value, not part of a hedging

relationship, to be recognised

= Measurement of fair value by

-- Market price
-- Valuation techniques
-- Reference to similar instruments
-- DCO / option pricing models

= Reclassification of assets ± conditional, subject to

-- Difference between carrying amount and fair value is
to be recognised
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= Hedge Accounting


 


  
 

 
   
 
 


      

 

 

= Non-hedge accounting

  

 


 
  



 
 
  


 

  
 





A DERIVATIVE IS A OINANCIAL INSTRUMENT:

= mhose value changes in response to the change in
the underlying variable, such as an interest rate,
exchange rate, commodity price or stock index
= That requires no initial investment, or one that is
smaller than would be required for a contract with
similar response to changes in market factors; and
= That is settled at a future date net in cash or or
another financial instrument or by exchange of
financial instruments.




 



mritten options and purchased options

= The hedger should not receive net premium (RBI / IAS

39 / OAS 133)
= Notional amount of written options should not be more
than the purchased options (addl under OAS 133)
 
  



 

 
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= Objective
- Assessment of hedge performance
Change in fair value of the hedge should offset the
change in the fair value of the underlying (ratio in the
range of 80:125)

= Disclosure in the accounts

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= : change in fv of the hedge and hedged

instrument recognised in P&L

=  !"#$: cumulative change in the value of hedge

for financial commitment recognised as asset or liab.-
only ineffective part is recognised in P&L

=
% &'%&!() : gain or loss in OV recognised

only in BS and transferred to P&L when the
investment is disposed off


 




= Prospective & retrospective testing

= Hedge relationship in the range of 80:125
= Does not prescribe specific measure
= Permits hedge ratio >1
= Minimum once at the time of preparation of annual
/ interim financial statements


 






= Dollar off-set method

= Ratio Analysis
= Correlation / Regression analysis
= Critical aspects matching (for prospective testing)




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= Derivatives defined

= Combination of options permitted provided it

is not a net written option, where net premium
is received
Eg. p

 

 

 




= Hedging of non-financial risks ± weather

derivatives permitted




= BS hedging permitted for hedging OC risk (non-
derivative finl assets & liabilities)

= Inter-group transactions do not qualify as hedge in

the consolidated BS, but can be shown in the
accounts of individual entity

= Hedging relationship for the hedge instrument in its

entirety
(Exceptions: separation of intrinsic value and time
value of option contract & separation of interest
element and spot price in a forward document)

= HTM asset can not be hedged against interest rate

risk or pre-payment risk (OC risk permitted)
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= Underlying exposure ± either existing or a forecast

highly probable transaction

= The specific risk intended to be hedged

= The hedging instrument

= Hedge relationship ± either fair value hedge or

cashflow hedge
= Oair Value Measurement ± cumulative or incremental

= Effectiveness testing ± testing frequency and testing

method

= Compliance with policy

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= Prudential norms for users and market makers

- Price transparency for structured products
- Suitability and appropriateness policy for market-
makers
- Corporate governance: comprehensive policy for
derivatives
- Prescription of risk limits

  

,

= A policy approach is essential for corporate treasury

= Risk mgt for forex / liquidity / investment and credit

risk ± important elements of Cl. [9 requirement

= It is obligatory to have a derivatives policy defining

- Permitted derivatives
- MTM valuation
- Stop-loss limits
- Hedge performance and
- Disclosures
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= Have a risk management policy

= Put in place processes to track target rates

= Define permitted instruments for hedging

= Check MTM value at every step

= Comply with risk limits on open position and stop loss

limits

= Commit risk capital for trading positions

= Check impact on accounts

= Review & update policy every year