By Graeme Tosen
Graeme Tosen, the chief for technical accounting at HBOS Treasury companies in London, has written a step by step advisor to knowing and imposing the hugely technical accounting ideas of the overseas monetary Reporting criteria (IFRS) that observe to derivatives and based finance.
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Extra info for A Practical Guide to IFRS for Derivatives and Structured Finance
Example 2: Asset and liability mismatch An entity has a repurchase transaction with a special purpose entity (SPE) where it lends cash at a fixed rate and holds equity instruments as collateral and, as part of the same structure, a related derivative with another SPE. No hedge accounting is allowed and the derivative is therefore accounted for at fair value with movements in fair value going through profit or loss. Will the entity be allowed to fair value account for the loan to the first SPE to eliminate some of the income statement volatility created by the derivative?
No. You either have to separate the derivative or you are not allowed to. There is no option/choice provided in the standard. How are synthetic positions treated where the derivative is legally a separate contract? Where you have a separate debt contract and derivative, which is treated as one synthetic contract by the entity, you may not apply the embedded derivative rules. The embedded derivative rules only apply where a derivative is embedded in the terms of a hybrid contract. In the synthetic case here, each contract would be treated separately and the derivative will have to be classified as held-for-trading, even if the terms, risks and characteristics are closely related to the debt contract.
The legal or contractual form would not play a major role. Based on IAS 39, but specifically and more importantly the definition of a financial guarantee contract as set out in IAS 39, a credit derivative will only be treated as a financial guarantee contract if all of the following criteria are met. • There is a transfer of significant credit risk from the buyer to the seller. • The buyer has exposure to the referenced credit risk. • Payment under the derivative is only made on default by a debtor and not on any other factor such as changes in credit rating.
A Practical Guide to IFRS for Derivatives and Structured Finance by Graeme Tosen