After studying this chapter, you should be able to: Understand how derivatives are used in hedging and explain the need for hedge accounting standards, understand how to apply hedge accounting standards, account for share appreciation rights plans,. | 1 CHAPTER 16: COMPLEX FINANCIAL INSTRUMENTS 2 2 CHAPTER 16: Complex Financial Instruments After studying Appendix 16A, you should be able to: 8. Understand how derivatives are used in hedging and explain the need for hedge accounting standards. 9. Understand how to apply hedge accounting standards. After studying Appendix 16B, you should be able to: 10. Account for share appreciation rights plans. After studying Appendix 16C, you should be able to: 11. Understand how options pricing models are used to measure financial instruments. 12. Describe and analyze required fair value disclosures for financial instruments. 3 3 Derivatives Used For Hedging Organizations face economic and financial risks Hedging is the use of derivatives to hedge these risks Hedging has value because it generally reduces uncertainty/risk and therefore volatility Must separate the act of hedging (to reduce economic and financial risks) from the accounting for the hedge 4 LO8 Understand how derivatives are used in hedging and explain the need for hedge accounting standards. 4 Need for Hedge Accounting Standards If symmetry in accounting exists, the gains/losses created by hedging offset in the same period In this situation, there is no need for special hedge accounting If there is no symmetry in accounting, the gains/losses created by hedging do not offset in same period In this situation, companies may choose to apply hedge accounting so that the gains/losses do offset 5 LO8 Understand how derivatives are used in hedging and explain the need for hedge accounting standards. 5 Need for Hedge Accounting Standards The mixed measurement model under ASPE and IFRS (for example, choices include fair value, amortized cost, and cost); The treatment of the related gains and losses where fair value is used (under IFRS sometimes the resulting gains and losses are booked to income and sometimes to OCI); The existing practice of hedging future transactions that are not yet recognized on the SFP (that is as . | 1 CHAPTER 16: COMPLEX FINANCIAL INSTRUMENTS 2 2 CHAPTER 16: Complex Financial Instruments After studying Appendix 16A, you should be able to: 8. Understand how derivatives are used in hedging and explain the need for hedge accounting standards. 9. Understand how to apply hedge accounting standards. After studying Appendix 16B, you should be able to: 10. Account for share appreciation rights plans. After studying Appendix 16C, you should be able to: 11. Understand how options pricing models are used to measure financial instruments. 12. Describe and analyze required fair value disclosures for financial instruments. 3 3 Derivatives Used For Hedging Organizations face economic and financial risks Hedging is the use of derivatives to hedge these risks Hedging has value because it generally reduces uncertainty/risk and therefore volatility Must separate the act of hedging (to reduce economic and financial risks) from the accounting for the hedge 4 LO8 Understand how derivatives are used in
