By Graeme Tosen
Graeme Tosen, the executive for technical accounting at HBOS Treasury prone in London, has written a step by step advisor to knowing and enforcing the hugely technical accounting principles of the overseas monetary Reporting criteria (IFRS) that observe to derivatives and dependent finance.
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Additional resources for A Practical Guide to IFRS for Derivatives and Structured Finance
A group of the above. This is easier said than done, though. Except for a portfolio of interest rate risk (where specific exceptions apply) you can only do ‘macro’ hedging if the risk characteristics of the portfolio of assets or liabilities are similar and the individual fair values move proportionately to that of the entire portfolio. A portfolio of FTSE 100 equities would, for example, never qualify because the probability of all individual shares moving in the same direction and the same proportion as the entire group is very unlikely.
One instrument hedging more than one risk is allowed. For instance, the entity can therefore have a derivative hedging the interest rate risk and the foreign currency risk of a hedged item. 39 Hedge accounting • A combination of instruments to act as a hedging instrument is allowed, but all the other rules (for example, the written option rule discussed above) still apply. It is therefore possible to combine a non-derivative asset and a derivative to hedge foreign currency exposure or two or more derivatives to hedge interest rate risk.
This has not yet been addressed by the IASB in enough detail. The standard does state that a projection (a reliable estimate is presumed) of cash flows should be made, which also suggests that the maturity should be projected. Where a reasonable estimate of this is impossible, however, effective interest rate-based amortised cost may not be possible. In practice, firms have moved to account for such assets at historical cost. 19 Fair value and amortised cost accounting What do you include in effective interest rate calculations?
A Practical Guide to IFRS for Derivatives and Structured Finance by Graeme Tosen