Dear Professional members,

Hedge Accounting for Equity Options – a free online course is now available at Free Online Courses on Accounting

Hedge Accounting for equity options iscovered by Accounting Standards (AS 30 in India and IAS 39 under IFRS).

This course explains the following concepts.

Topic 1: Accounting Standards for Hedge Accounting

Lesson1 – Derivative Instruments & Hedging

Lesson2 – Differences between US GAAP & IFRS

Lesson3 – Salient Features of Hedge Accounting Standards

Completion certificate for Topic 1 – Accounting Standards for Hedge Accounting

Topic 2: Features of Accounting Standards relatingto Options

Lesson 4 – Options as Hedge

Lesson5 – When is hedge accounting permissible for Options?

Completion certificate for Topic 2 – Accounting Standards relating to Options

Topic 3: ETOs – Long Put as Hedging

Lesson6 – Trade life cycle of Option Contract

Completion certificate for Topic 3 – Trade Life Cycle of Equity Options

Topic 4: Illustration of Hedge Accounting forOptions

Lesson 7 – Put Options as Hedge

Summary of Hedge Accounting for Equity Options – Recapitulate Lesson

Assignment- Submit the answer in Excel or Word Document

Completion certificate for Topic 4 – Hedge Accounting for Options

Get your Merit Certificate for the entire Course

Completion certificate for the entire Course

Please feel free to take the course at http://courses.accountingforinvestments.com/

R. Venkata Subramani

Dear Professional members,

Sri A. Selvaraj, CCIT (Retd.) has consented to share his insight in Income Tax Laws under the head Salary Income and Tax deducted at source thereon for ‘Accounting for Investments’, which we gratefully acknowledge.

Sri A.Selvaraj, Chief Commissioner of Income Tax (Retd.) was the Chief Commissioner of Income tax at Mumbai, Indore and Chennai, till 2007. As Additional Director (Faculty), National Academy of Direct Taxes, Nagpur 1992 -1995 introduced several innovations in teaching tax law and he was the popular Course Director of the 46th Batch of Indian Revenue Service during 1993 -1994.

Mr. Selvaraj was a Member of the Expert Group for rewriting and simplifying the Income tax Act. As convener of the latter, forcefully canvassed for and succeeded in expressing tax law in simple and direct language.

He is considered a resourceful trainer in tax law, tax practices and tax investigations and in areas of general law and management, and is the visiting faculty of several institutions, both government and private.

Professional colleagues are requested to please feel free to take the quiz at http://courses.accountingforinvestments.com/

R. Venkata Subramani

We have now started the online resources for Accounting Studies.

Visit: Online Courses on Accounting Studies

What topics are covered here?

• Online courses are available on several topics of professional interest in the Accounting and Finance area
  
  • Accounting Standards as per US GAAP, IFRS, etc.
  • Financial Instruments like equity derivatives, Interest Rate Derivatives, Credit Derivatives, Foreign Exchange Instruments,
    
  • Hedge Accounting

How much does it cost me?

• Online courses provided here are absolutely free.
  

Dear Friend,

Please leave your valuable feedback on the various online course taken by you in this site.

This will enable us to improve the presentation.

Best Regards,

R. Venkata Subramani

Protection

The buyer gets ‘protection’ on credit risk of the issuer. The seller acts as an insurer for the notional value of the CDS. The seller gets the premium and that is the maximum revenue that the seller of the protection gets.

Credit risk

The credit risk forms the subject matter of this insurance contract. ISDA enlists certain events as credit events, the occurrence of which triggers the termination of the contract.

Bilateral contract

The CDS contract has two parties the buyer of protection and the seller of protection. The contract is done over-the-counter (OTC).

Reference entity

The Issuer of the fixed income security on which protection is bought and sold is known as the Reference entity. The Reference entity could be a corporate entity or it could be a ‘Country’.

Reference Obligation

The specific security on which the protection is bought and sold is known as the ‘Reference Obligation’. The terms of the reference obligation are spelt out in the contract – for example, senior, senior-secured, senior-unsecured etc.

Protection buyer

The ‘Protection buyer’ pays a fixed premium on a quarterly basis to the protection seller and the premium is all that has to be paid by the buyer of protection. The protection buyer is the insured.

Protection seller

Effectively the ‘Protection seller’ is the insurer. The protection seller lodges a percentage of the underlying with the protection buyer as collateral for the transaction. This partially ensures that the protection seller is in a position to fulfill his obligation when the credit event occurs.

Credit events

The ISDA agreement specifies the standard credit events and the specific CDS contract will specify which credit events are covered in the particular contract.

Fixed income securities are issued by a company to raise debt financing.  These are called corporate bonds and usually these bonds have a fixed coupon rate and a fixed maturity period usually 10 to 30 years. The coupon rates can also be variable and can be linked to any interest rate like LIBOR. An investor can subscribe to these bonds directly from the company at the time of initial issue or these can be bought from the secondary market. When an investor buys the bonds then the investor is subject to several kinds of risks as follows:

Interest rate risk

Fluctuations in the market interest rate will affect the market rate of the security. The interest rate and the market rate of fixed income security are inversely correlated. When the interest rate goes up, market rate of the fixed income security goes down and vice-versa.

Currency rate risk
Securities purchased in foreign currency are exposed to risk of fluctuations in foreign exchange rate. This will affect the effective yield of a security.

Issuer default risk

The issuer may default in the payment of interest and / or principal amount if the issuer faces liquidity crisis or files bankruptcy.

Issuer credit rating risk

The credit rating of the Issuer may undergo change and if it is downgraded the market rate of the security also will suffer to that extent.

An investor can take protection against each type of risk. There are hedging instruments available to cover the interest rate risk as well as currency risk. For the interest default or issuer bankruptcy risk the investor can buy protection and this form of protection is known as ‘Credit Default Swap’.

Credit card companies in the United States offered sub-prime credit cards usually with lower credit limits and charged high fees and interest rates sometimes as high as 30% or more. With slowdown in economic growth in the United States in 2002, the default rates for sub-prime credit card holders increased, compelling sub-prime credit card issuers to reduce or cease operations.

In 2007, many new vendors emerged making the market more competitive, forcing issuers to make the cards more attractive to consumers which resulted in the interest rates being available as low as 9.9% but even then in some cases it goes as high as 24%.

Following settlement date accounting, the asset as well as the liability is recognized on the settlement date. Here the asset gets recorded only at the value at which it is actually settled, the difference between the cost of acquisition actually payable for such investment and the value at which it is recorded in the books of accounts being taken as realized gains on the date of acquisition itself. If the asset is held for trading then it is taken to the profit and loss account directly, and if the asset is an ‘available-for-sale’ asset then it is taken directly to the equity as ‘other comprehensive income’.

Even if the asset happens to be in foreign currency, since the asset is recorded only the date of settlement, the revaluation entries in the functional currency is recorded only at the rate at which it actually gets settled and hence there is no necessity to record any FX translation entries in this case.

When an asset is purchased, in trade date accounting, the asset is recognized and brought into the books of account on the date of trade and a corresponding liability is established. The liability is knocked off when the settlement of the liability happens. When the asset purchased is in a foreign currency, it leads to a little more complication. The asset is recognized in the functional currency in which the reporting is made, on the basis of the foreign exchange rate that prevails as on the date of trade. The corresponding liability is also created equivalent to the asset purchased. However when the settlement is done after a few days, the foreign exchange rate is likely to be different from the rate at which the asset was converted. Hence when recording the settlement event in the functional currency, the liability would appear to be settled in the functional currency as either over paid or under paid. This is dealt with by passing appropriate FX translation entry known as ‘Consummated FX translation entry’.

This represents accounting for currency gains or losses that are seen on the continuing assets or liabilities of the investor. Example of this type includes the currency gains on the market value of the equity shares as recorded in the functional currency. This type of gain or loss is of temporary in nature and will be either reversed the next day or passed on an incremental basis, meaning that it is subject to change on a daily basis depending upon the FX rates prevailing at that day. This is called  ‘Transient FX translation entries‘