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Chapter Arrangement

Chapter 1
Financial Instruments – The first chapter covers the Accounting Standards for financial instruments and discusses the definition of financial instruments, financial assets and financial liabilities. The various categories of financial instruments contemplated by the accounting standards are discussed along with the fair value measurement concepts. Recognition and de-recognition of financial instruments are covered in brief.
The different types of investments an investor can make is outlined, even though this volume covers investments in equity, equity futures and equity options. The main difference between investment and speculation is given.
The two major accounting standards viz., – US GAAP and IFRS are discussed giving the hierarchy of both and the measures taken towards the convergence of both the standards.

Chapter 2
Equity Accounting for Trading – This chapter covers the accounting for equity shares held for trading purposes. After defining equity investment as per the accounting standards, the different types of investments viz., – passive investments and investments commanding significant influence as well as controlling interest is discussed. The broad classification of trading and available-for-sale is given. The brief distinction between exchange traded securities and over the counter securities is analyzed. The trade life cycle for equity shares held as trading securities is given with the accounting entries to be passed at the various stages. A comprehensive illustration of investment in long equity shares held as trading securities is covered, giving the journal entries, general ledger, income statement and balance sheet for the said illustration.
Distinction between FX revaluation and FX translation is given in great detail along with the explanation of functional currency, presentation currency, trade currency and the requirements of accounting standards in this regard. Another worked out illustration covers equity shares in trade currency of JPY with the functional currency of USD explaining the FX revaluation and FX translation processes.
The differences between trade date accounting and settlement date accounting is explained giving the behavior of held for trading and available for sale securities on trade date, reporting date and settlement date for various parameters like the financial asset, the liability as well as the changes in the fair value to the financial asset.
Distinction between capital gains and currency gains and the treatment and presentation of such gains for equity shares is given in detail.

Chapter 3
Equity Accounting for AFS – This chapter covers the accounting for equity shares that are held as available for sale. The trade life cycle for equity shares classified as available for sale securities is given with the accounting entries to be passed at the various stages. Worked out illustration covers equity shares in the functional currency of USD held as available for sale. One more illustration is given on trade currency with FX translation into the functional currency of USD.

Chapter 4
Transfer between categories – This chapter covers the transfers between trad-ing securities to available for sale securities and vice versa. Also the presentation in Income statement when there is an impairment of securities as well as realized and unrealized gains or losses is treated. When a category change happens it also impacts the deferred tax on unrealized gain/loss and this is explained with an illustration.

Chapter 5
Equity Derivatives Theory – This chapter explains derivatives in a financial security and lists down various types of derivative contracts with the corresponding underlying variable. The definition of derivatives as per Accounting Standards is covered. Also the differences between US GAAP and IFRS in respect of derivative accounting are given. This chapter covers the distinction between a forward contract and a futures contract is explained discussing the essential components of a future contract. The subtle differences between hedging, speculation and arbitrage are discussed. The limitations of forward market and the advantages of futures contract are discussed.
Open interest in derivatives contract, the method of computing the same and the implications of a change in open interest is elaborately discussed. Pricing of a futures contract and the cost of carry is analyzed. Stock futures and Index futures and the concept of systematic and unsystematic risks are also covered in this chapter.

Chapter 6
Equity Index Futures – This chapter covers the accounting requirements for equity index futures contracts. The salient features of a stock index and index futures are discussed with special reference to systematic and unsystematic risks. The trade life cycle for equity index futures is given with the accounting entries to be passed at the various stages.
Worked out illustration covers exhaustively equity index futures – both in trade currency other than USD and in the functional currency of USD.

Chapter 7
Equity Stock Futures – This chapter covers the accounting requirements for equity stock futures contracts. The trade life cycle for equity stock futures is given with the accounting entries to be passed at the various stages.
Worked out illustration covers exhaustively equity stock futures – both in trade currency other than USD and in the functional currency of USD.

Chapter 8
Equity Call Options – This chapter covers the accounting requirements for exchange traded equity call options. The trade life cycle for equity long call options is given with the accounting entries to be passed at the various stages. This chapter covers only if the call option is held as a speculative position and not as a hedge against the underlying shares. Worked out illustration covers exhaustively equity long call options – both in trade currency other than USD and in the functional currency of USD.
The trade life cycle for equity short call options is also covered in this chapter with the accounting entries to be passed at the various stages. The worked out illustration covers exhaustively the treatment of equity short call options in USD.

Chapter 9
Equity Put Options – This chapter covers the accounting requirements for exchange traded equity put options. The trade life cycle for equity long put options is given with the accounting entries to be passed at the various stages. This chapter covers only if the put option is held as a speculative position and not as a hedge against the underlying shares. Worked out illustration covers exhaustively equity long put options – both in trade currency other than USD and in the functional currency of USD.
The trade life cycle for equity short put options is also covered in this chapter with the accounting entries to be passed at the various stages. The worked out illustration covers exhaustively the treatment of equity short put options in USD.

Chapter 10
Equity Options – hedge accounting – This chapter covers the accounting for equity options that are held as a hedge against an underlying share. The definition of derivative, financial asset and financial liability as per the accounting standards is discussed. The similarities and differences between the US GAAP and IFRS in so far as it relates to derivatives and hedge accounting is discussed elaborately under the various topics like definition, initial measurement, subsequent measurement, changes in the fair value of derivative instrument, and hedge accounting criteria. The salient features of the Accounting Standards are covered in great detail.
Specific features of the Accounting Standards in so far as it relates to options as hedge, the rationale of hedge accounting for written options and covered calls, exception to single fair value measure rule as well as the question whether hedge accounting is possible for delta neutral hedging strategy is covered. A table illustrates as to when hedge accounting is permissible as far as options are concerned.
The trade life cycle for long equity options is covered in this chapter with the accounting entries to be passed at the various stages. The worked out illustration covers exhaustively the treatment of equity put options in USD that are purchased as a hedging instrument against an underlying share.

Chapter 11
Contract For Difference – This chapter covers the accounting requirements for contract for difference contracts. Definition and product features of CFD are covered including the concepts of margin, funding cost, interest on clear margin and so on. The advantages and disadvantages of CFD as an investment instrument is analyzed. The method of terminating CFD and its effects are also discussed.
The trade life cycle for CFD contracts is given with the accounting entries to be passed at the various stages. Worked out illustration covers exhaustively equity stock futures – both in trade currency other than USD and in the functional currency of USD.

Chapter 12
Accounting for Equity – Short selling and stock lending – This chapter covers the accounting requirements for short selling including the requirements for a box position where both the long and short positions are maintained by the investor. Typically this practice is resorted to by the hedge funds. Since there are some regulatory issues on short selling, the investor will do well to comply with the laws of the land whenever short positions are taken. The custodian also ensures to keep the long and short positions separately for the investor to facilitate position reconciliation and accounting. The stock lending which is intertwined with the short position trading is also dealt with in this chapter especially the requirements and accounting treatment of cash collateral deposited with the broker as well as the stock lending fee payments and the interest receipts relating to the cash collaterals with the broker.

Chapter 13
Accountings for ADR/GDR – International Depositary Receipts are becoming increasingly popular and this chapter covers the accounting treatment of ADRs. The investor usually holds position of the same stock in both the local exchange as well as in ADRs. The stock is sold at a convenient time in the local stock exchange and to that extent the ADRs are converted into the local equity shares incurring conversion charges. This chapter illustrates how the cost of such conversion is arrived at and how the profit on liquidation is computed and accounted.

Chapter 14
Presentation and disclosure – Accounting Standards require specific presentation and disclosure norms for financial instruments. The similarities and differences between US GAAP and IFRS in so far as it relates to equity investments is given in tabular form under various topics like definition, recognition, valuation, impairment, reclassification and so on. The disclosure requirements of both the accounting standards are given at the end of the chapter.

Appendix A—Basics of Accounting Theory
This appendix gives an overview of the basics of accounting theory, covering the basic assumptions underlying the accounting framework. It also discusses the basic accounting concepts and the basic principles of accounting. The accounting model and the elements of basic reporting are also discussed with reference to the concept statement number 6 of U.S. GAAP.

Appendix B—Accounting Standards for Financial Instruments
Appendix B gives an overview of the various accounting standards for financial instruments. It covers IAS 39—Recognition and Measurement of Financial Instru-ments; IAS 32—Presentation of Financial Instruments; and IFRS 7—Disclosure of Financial Instruments.

Appendix C—Financial Statements of a Sample Fund
This appendix gives the financial statements of a sample fund to illustrate the concepts of presentation and disclosure requirements of the various accounting standards for financial instruments in the context of IFRS as it stands today.

Appendix D—Glossary of Technical Terms
The final appendix gives a quick reference of various technical terms that are used in the context of accounting for investments. Of course many of the terms are elaborated in great detail elsewhere in this book.

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