After studying this chapter, you should be able to: Understand what derivatives are and how they are used to manage risks; understand how to account for derivatives; analyze whether a hybrid/compound instrument issued for financing purposes represents a liability, equity, or both;. | 1 CHAPTER 16: COMPLEX FINANCIAL INSTRUMENTS 2 2 CHAPTER 16: Complex Financial Instruments After studying this chapter, you should be able to: Understand what derivatives are and how they are used to manage risks. Understand how to account for derivatives. Analyze whether a hybrid/compound instrument issued for financing purposes represents a liability, equity, or both. Explain the accounting for hybrid/compound instruments. Describe the various types of stock compensation plans. Describe the accounting for share-based compensation. Identify the major differences in accounting between IFRS and APSE, and what changes are expected in the near future. 3 3 Financial Instruments Financial instruments: contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party Financial instruments can be primary or derivative Primary financial instruments: include most basic financial assets and financial liabilities such as receivables and payables, and equity instruments such as shares 4 4 LO1 Understand what derivatives are and how they are used to manage risks. Derivatives Derivatives are financial instruments that create rights and obligations that transfer financial risk from one party to the another party Derivatives have the following characteristics: Their value changes in response to the underlying instrument (the “underlying”) 2. They require little or no initial investment They are settled at a future date 5 5 LO1 Understand what derivatives are and how they are used to manage risks. Derivatives Derivative instruments include: Options Forwards Futures Example: Stock Options The stock is the “underlying” If the share price goes up, the option is worth more; If the share price goes down, the option may become worthless 6 6 LO1 Understand what derivatives are and how they are used to manage risks. Derivatives – Financial Risks Derivatives are used to manage financial risks: Credit Risk Risk to one party that the | 1 CHAPTER 16: COMPLEX FINANCIAL INSTRUMENTS 2 2 CHAPTER 16: Complex Financial Instruments After studying this chapter, you should be able to: Understand what derivatives are and how they are used to manage risks. Understand how to account for derivatives. Analyze whether a hybrid/compound instrument issued for financing purposes represents a liability, equity, or both. Explain the accounting for hybrid/compound instruments. Describe the various types of stock compensation plans. Describe the accounting for share-based compensation. Identify the major differences in accounting between IFRS and APSE, and what changes are expected in the near future. 3 3 Financial Instruments Financial instruments: contracts that create both a financial asset for one party and a financial liability or equity instrument for the other party Financial instruments can be primary or derivative Primary financial instruments: include most basic financial assets and financial liabilities such as receivables and
