Are weather derivatives covered by IAS 39 or are they insurance contracts?

Contracts that require payment only if a particular level of the underlying climatic, geological or other physical variables adversely affects the contract holder are insurance contracts and as such are outside the scope of IAS 39.

However contracts that require a payment based on a climatic, geological or other physical variable that is not specific to a party to the contract are commonly described as weather derivatives and by virtue of IFRS 4 these contracts are not insurance contract. Hence the weather derivatives are within the scope of IAS 39.

As per US GAAP, Cash flow hedge accounting for a foreign currency debt is permissible using a FX forward contract to cover the Foreign Exchange risk . Section 815-20-25-28 is quoted below:

“If the hedged item is denominated in a foreign currency, an entity may designate any of the following types of hedges of foreign currency exposure:
a. A fair value hedge of an unrecognized firm commitment or a recognized asset or liability (including an available-for-sale security)
b. A cash flow hedge of any of the following:
1. A forecasted transaction
2. An unrecognized firm commitment
3. The forecasted functional-currency-equivalent cash flows associated with a recognized asset or liability
4. A forecasted intra-entity transaction.
c. A hedge of a net investment in a foreign operation.”

Such a cash flow hedge is specifically permitted by virtue of Section 815-20-25-29 which is quoted below:

“The recognition in earnings of the foreign currency transaction gain or loss on a foreign-currency-denominated asset or liability based on changes in the foreign currency spot rate is not considered to be the remeasurement of that asset or liability with changes in fair value attributable to foreign exchange risk recognized in earnings, which is discussed in the criteria in paragraphs 815-20-25-15(d) and 815-20-25-43(c).

Thus, those criteria are not impediments to either of the following:
a. A foreign currency fair value or cash flow hedge of such a foreign-currency- denominated asset or liability
b. A foreign currency cash flow hedge of the forecasted acquisition or incurrence of a foreign currency-denominated asset or liability whose carrying amount will be remeasured at spot exchange rates under paragraph 830-20-35-1.

Is this type of a transaction eligible as a Cash Flow hedge under IAS 39 of IFRS? …read more on Forum

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• CD-ROM
• Publisher: Wiley (May 20, 2010)
• Language: English
• ISBN-10: 0470621907
• ISBN-13: 978-0470621905

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The Ultimate Accountants’ Reference offers a single-source tool of best practices and control systems related to accounting regulations for all aspects of financial statements, accounting management reports, and management of the accounting department. The perfect daily answer book for the practicing accountant, it also addresses financing options, risk management, mergers and acquisitions, and taxation topics.

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Accountants, accounting managers, and finance personnel will turn to The Ultimate Accountants’ Reference time and again for quick, reliable answers to everyday issues. –This text refers to an out of print or unavailable edition of this title.

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The Securities and Exchange Commission has started an inquiry into about two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.

Repurchase agreements, which are a common way that investment banks provide funds for trading activities. The commission wants to know whether other Wall Street players used tactics like those that Lehman used to mask their debt levels from investors.

This inquiry is part of its duties to review the financial filings of public companies and any irregularities will be sent to its enforcement wing to eventually bring charges on such errant companies.

As per the news item appearing in New York Times, “Since Lehman was accused of using a transaction known as Repo 105 in 2008 to hide about $50 billion in debt, analysts have said there should be a widespread inquiry of accounting on wall Street before the financial crisis.

The commission is focusing on all sorts of repurchase agreements, not just those Lehman used. The commission asked the companies if they had classified the transactions, which are often considered loans, as sales. The commission also asked whether those transactions affected data provided to investors, analysts, regulators or ratings agencies.”

See the full report here: http://www.nytimes.com/2010/03/30/business/30sec.html

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Your one-stop resource for understanding current International Financial Reporting Standards

With widespread acceptance and use of the IASB standards around the globe, the need to understand the IASB standards greatly increases. Wiley IFRS 2010 provides the necessary tools for understanding the IASB standards and offers practical guidance and expertise on how to use and implement them. The Wiley IFRS 2010 Book and CD-ROM set covers the most recent International Financial Reporting Standards (IFRS) and IFRIC interpretations. In addition, it is an indispensable guide to IFRS compliance.

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Income of foreign institutional investors (FIIs) from derivatives trading will not be liable to tax in India, the Authority for Advance Rulings has said, clearing the air on taxability of the income of foreign investors trading in Indian securities.

The ruling will help FIIs undertaking similar transactions subject to the provisions of the tax treaties with their respective countries, say tax experts. The AAR’s ruling comes in response to a plea by Royal Bank of Canada, registered with market regulator Securities and Exchange Board of India as a FII, seeking clarity on whether profit or loss from trading in securities, including derivatives, will be treated as business income and be liable to tax in respect of India-Canada Double Taxation Avoidance Agreement.

“Its been a long pending debate between tax authorities and tax payers, especially foreign investors whether the income arising in respect of securities derivative transactions is in the nature of business income or capital gains…lots of cases have been filed on these issues and the current judgement clarifies, based on the facts of Royal Bank of Canada, that in the absence of a permanent establishment the income arising from such transaction will not be subject to tax,” said Vikas Vasal, partner, KPMG.

The revenue department’s contention that the income from such activities was capital gains and hence liable to tax in India was rejected by the Authority. The authority said the profit and loss was earned by the applicant out of trading activity.

Also, the Royal Bank of Canada does not have a permanent establishment or fixed place of business in India and as per the provisions of the India-Canada tax treaty its income could not be taxed here.

It may be pointed that most FIIs in India invest via Mauritius route to enjoy the capital gains tax exemption available under Indo-Mauritius tax treaty. In such a case profits and loss from such trading are treated as capital gains or loss. However, when an entity comes from any other country the provisions of the tax treaty with that country comes into play and investors usually treat income from such activity as business income which does not have to face tax if there is no PE.

Therefore facts of each case need to be examined in detail in order to determine whether the activity per se is to be treated as a business transaction or an investment transaction. In case its is determined that these are in nature of business income the next issue to be examined is whether the foreign investor has a business connection or a permanent establishment in India for taxability of the same. If it is established that there is now PE in India then generally the business income arising there from would not be subject to tax subject to provision of relevant tax treaty. If it the PE exists then profit attributed to such PE only will be subject to tax in India.

The AAR is a quasi-judicial body, set up to give opinion to guide companies on their potential tax liabilities. While rulings by the AAR are case-specific, they have a persuasive impact on tax assessment in cases of other firms under similar circumstances.

Source: Economic Times

The Indian government is set to introduce Bills to amend existing laws governing chartered accountants, cost accountants and company secretaries in the current Budget session, a senior government official said. The proposed amendments will allow registration of large size consultancy firms in India.

The amendments will remove the hurdles that come in way for members of ICAI, ICSI and ICWAI to jointly form Limited Liability Partnerships (LLPs). These amendments will enable formation of LLPs comprising professionals from different fields. Right now professional bodies are not able to form LLPs because of certain clauses in respective Acts.

Source: http://economictimes.indiatimes.com/news/economy/policy/Bill-letting-accounting-pros-form-LLPs-soon/articleshow/5613711.cms

While the SEC approved a statement supporting the adoption of global accounting standards for U.S. companies, the Chairman Mary Schapiro cautioned that, “Incorporating International Financial Reporting Standards (IFRS) into our financial reporting system would involve a significant undertaking. We must carefully consider and deliberate whether such a change is in the best interest of U.S. investors and markets.

“The Commission also voted to approve a Work Plan developed by SEC staff that would gather information to aid the Commission as it evaluates the impact that the use of IFRS by U.S. companies would have on our securities market,” Schapiro said. The Work Plan will be completed in 2011, the target date set by the 2008 Proposed Roadmap.

Schapiro said, however, that no decision had been made about the timing of a possible conversion to IFRS. “We must still determine what this means for U.S. companies and markets; should we incorporate IFRS into our reporting system and, if so, when and how?

Source: http://www.accountingweb.com/topic/cfo/sec-approves-work-plan-assess-us-adoption-global-accounting-standards

Sri T.N. Manoharan

The Government of India named Sri T.N. Manoharan the first accountancy professional from Tamil Nadu to be conferred with the Padma Shri award. Manoharan is based out of Chennai, India and was recently appointed as a board member of the scam-hit Satyam Computer Services and later made as its chairman before the company was taken over by the Mahindra group. He is a distinguished professional and has several acheivements to his credit. Son of T.L. Narayana Chowdhry, a 93-year-old a freedom fighter, Manoharan, 52, is a partner in Manoharan Chowdhry Associates. He is also the past president of the Institute of Chartered Accountants of India (ICAI).

Padma Shri is an award given by the Government of India generally to Indian citizens to recognize their distinguished contribution in various spheres of activity including the Arts, Education, Industry, Literature, Science, Sports, Medicine, Social Service and public life. It stands fourth in the hierarchy of civilian awards after the Bharat Ratna, the Padma Vibhushan and the Padma Bhushan. On its obverse, the words “Padma”, meaning lotus in Sanskrit and “Shri”, in Devanagari script, appear above and below the lotus flower. The geometrical pattern on either side is in burnished bronze. All embossing is in white gold.

‘Accounting for Investments’ blog congratulates Sri T. N. Manoharan on being conferred with the Padma Shri award.