Advanced Accounting

Session 1 and
Accounting for Derivative

Instruments
Edited by Taufik Hidayat
Agend
a
1.
2.
3.
4.
5.
6.
7.
Financial Intruments and Derivative.

Forward Contracts.
Future Contracts.
Hedge using forward and future contracts.
Option.
Swap.
Hedge using option and swap.
Session 1
Session 2
Financial Instruments
Financial instrument is formally defined in PSAK 50 while PSAK 55
refers to the same definition as follows:
A financial instrument is any contract that gives rise to
a financial asset of one entity and
a financial liability or equity instrument of another entity.
Financial
Financial
instrument
instrument
Financial
Financial
asset
asset
Financial
Financial
liability
liability
of one entity
or
Equity
Equity
instrument
instrument
of another entity
Financial Instruments (2)

Financial
Financial asset is any asset that is:
Financial
asset
asset
Cash
Financial
Financial
instrument
An equity instrument of another entity
instrument
A contractual right
i) to receive cash or another financial asset from another entity
ii) to exchange financial assets or financial liabilities with another entity under
conditions that are potentially favourable to the entity
A contract that will or may settled in the entitys own equity instruments and is
i) a non-derivative for which the entity is or may be obliged to receive a variable
number of the entitys own equity instruments; or
ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entitys own
equity instruments. For this purpose the entitys own equity instruments do not
include certain instruments,
say specified puttable financial instruments, or instruments that are
contracts for the future receipt or delivery of the entitys own equity
instruments
Financial Instruments (3)

Financial liability is any liability that is
A contractual right
i) to deliver cash or another financial asset from another entity
ii) to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavourable to the entity
A contract that will or may settled in the entitys own equity instruments and is
i) a non-derivative for which the entity is or may be obliged to deliver a variable
number of the entitys own equity instruments; or
ii) a derivative that will or may be settled other than by the exchange of a fixed
amount of cash or another financial asset for a fixed number of the entitys
own equity instruments. (For this purpose, certain other conditions are
required to observe)
Financial
Financial
instrument
instrument
Financial
Financial
liability
liability
Definition of Derivative
Derivative
is a financial instrument or other contract within the

scope of PSAK 55 with all 3 of the following
characteristics:
Value
Valuechange
changebased
based
on
onan
anunderlying
underlying
a) its value changes in response to the change in a specified

interest rate, financial instrument price, commodity price,
foreign exchange rate, index of prices or rates, credit rating
or credit index, or other variable (sometimes called the
underlying);
Little
Littleor
orno
noinitial
initialnet
net
investment
investment
b) it requires no initial net investment or an initial net

investment that is smaller than would be required for other
types of contracts that would be expected to have a similar
response to changes in market factors; and
Settled
Settledat
at
aafuture
date
future date
c) it is settled at a future date.
Derivative Instruments
Example
Example
Melody Limited makes a five-year fixed rate loan to Tony Inc, while
Tony at the same time makes a five-year variable rate loan for the
same amount to Melody.
There are no transfers of principal at inception of the two loans, since
Melody and Tony have a netting agreement.
Is this a derivative under PSAK 55?
Yes.
Yes.
This
This meets
meets the
the definition
definition of
of aa derivative
derivative (that
(that isis to
to say,
say, there
there isis an
an
underlying
underlyingvariable,
variable,no
noinitial
initialnet
netinvestment
investmentor
oran
aninitial
initialnet
netinvestment
investment
that
that isis smaller
smaller than
than would
would be
be required
required for
for other
other types
types of
of contracts
contracts that
that
would
would be
be expected
expected to
to have
have aa similar
similar response
response to
to changes
changes inin market
market
factors,
factors,and
andfuture
futuresettlement).
settlement).
Derivative Instruments (2)

Example of derivative instruments and their underlying
Types of derivative
instruments
Underlying
Used by
Option contracts
(call and put)
Security price
Producers, trading firms,

financial institutions, and
speculators
Forward contracts
e.g. foreign exchange
forward contract
Foreign
exchange rate
Various companies
Future contracts
e.g. commodity futures
Commodity
prices
Producers and
consumers
Swaps
Interest rate
Financial institutions
Derivative Instruments (3)

Use of derivatives
1. Manage market risk
2. Reduce borrowing cost
3. Profit from trading or speculation
Types of derivatives
1. Forward type derivatives such as forward contracts,
future contracts and swaps
2. Option-type derivatives such as call and put options,
caps and collars and warrants
3. Free standing derivatives
4. Embedded derivatives
Compound Financial Instrument

& Embedded Derivative
There are certain financial instruments that have a
hybrid or combined nature.
For example, a convertible bond is a debt instrument
with an embedded option to convert the debt
instrument to equity shares.
From the perspective of the issuer, the debt instrument is a
financial liability while the embedded option may be an
equity instrument.
From the perspective of the holder of that convertible bond,
the debt instrument is a financial asset and the embedded
option is similar to a derivative.
Compound Financial Instrument

& Embedded Derivative
In PSAK 50, from the perspective of an issuer, these
kinds of financial instruments are termed as compound
financial instruments.
PSAK 50 requires an issuer of a compound
financial instrument to separately classify different
components of the instrument in accordance with the
definition of financial liability and equity instrument.
In PSAK 55, from the perspective of a holder, these kinds
of financial instruments are termed as hybrid (combined)
instruments.
PSAK 55 requires a holder of a hybrid instrument to
separately account for the embedded derivative of
the instrument if certain conditions are fulfilled.
Will
Will be
be discussed
discussed in
in
session
session 33
Initial Recognition
Initial recognition requirements for financial
assets and financial liabilities in PSAK 55:
An entity is required to recognise a financial
asset or a financial liability on its balance
sheet when, and only when, the entity
becomes a party to the contractual
provisions of the instrument.
In other accounting standards, the
recognition criteria are
1) it is probable that future economic benefits
associated with the item will flow to (or flow out
from) the entity; and
2) the cost of the item can be measured reliably.
Imply
Imply trade
trade date
date
accounting
accounting
Imply
Imply settlement
settlement
date
date accounting
accounting
Initial Recognition (2)

The settlement date is the
to or by an entity.
The trade date is the date
purchase or sell an asset.
The recognition criteria in
recognise financial asset
becomes a party to the
instruments.
date that an asset is delivered

that an entity commits itself to
PSAK 55 require an entity to
or financial liability when it
contractual provisions of the
These criteria imply an entity to recognise financial asset or

financial liability on a trade date basis.
Initial Recognition (3)

In consequence of the recognition criteria of PSAK 55, all
the financial assets and liabilities, including derivatives
(such as options and futures), become on-balance sheet
from the trade date.
In other words, an entity is also required to recognise all of its
contractual rights and obligations under derivatives in its balance
sheet as assets and liabilities.
PSAK 55 specifically states that a contract that requires or

permits net settlement of the change in the value of the
contract (such as derivative contract) is not a regular way
contract.
Such contract is accounted for as a derivative in the period
between the trade date and the settlement date.
Initial Measurement
When a financial asset or financial liability (except for it at
fair value through profit or loss) is recognised initially, an
entity is required to measure it at:
1. its fair value plus
2. its transactions costs that are directly attributable to
the acquisition or issue of the financial asset or
financial liability.
In the case of a financial asset or financial liability that
will be classified as financial asset or financial liability
at fair value through profit or loss (FVTPL),
1. an entity is only required to measure it at its fair value
only
2. its transaction costs should not be recognised.
Derivative
Derivative
FVTPL
FVTPL
Initial Measurement (2)

Fair value is the amount for which an asset could be
exchanged, or a liability settled, between knowledgeable,
willing parties in an arms length transaction.
New definition of Fair Value based on PSAK 68: Fair
Value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the
measurement date.
Transaction costs are incremental costs that are directly
attributable to the acquisition, issue or disposal of a
financial asset or financial liability. An incremental cost is
one that would not have been incurred if the entity had
not acquired, issued or disposed of the financial
instrument.
Subsequent Measurement
Default accounting treatment for derivatives under PSAK 55:
Derivatives are classified under the Fair Value through Profit or Loss
category and changes in their fair values are taken to income
statement
Exception - when a derivative is designated as a hedge of an
identified risk and the hedge is effective. In this case, accounting for
the derivative follows hedge accounting rules.
Financial instrument at fair value through profit or loss

(including derivative) is initially recognised at fair value only.
After initial recognition, an entity is required to measure
financial instrument at fair value through profit or loss
(including derivative) at their fair values.
Derecognition of a Financial Asset

The general derecognition criteria in accordance with PSAK
55 require an entity to derecognise a financial asset when,
and only when:
1. the contractual rights to the cash flows from the financial asset
expire; or
2. the entity transfers the financial asset that meet the conditions set
out in PSAK 55 (i.e. asset transfer test) and
the transfer qualifies for derecognition in accordance with PSAK 55
(i.e. the risks and rewards test and the control test).
Derecognition of a Financial Liability

An entity is required to remove a financial liability (or a part
of a financial liability) from its balance sheet (i.e.
derecognise a financial liability) when, and only when, it is
extinguished.
PSAK 55 explains that a financial liability is extinguished when the
obligation specified in the contract is discharged or cancelled or
expires.
A financial liability or part of it is extinguished when the

debtor either:
1. discharges the liability or part of it by paying the creditor, normally
with cash, other financial assets, goods or services; or
2. is legally released from primary responsibility for the liability (or part
of it) either by process of law or by the creditor.
Forward Contracts
An agreement between two parties (counterparties) whereby one
party agrees to buy and the other party agrees to sell a specified
amount (notional amount) of an item at a fixed price (forward
rate) for delivery at a specified future date (forward date).
Can either be a forward purchase contract or a forward sales
contract, depending on the perspective of the counterparties.
A Company
Sells Forward
Contract
Forward sales contract
B Company
Forward purchase contract

Forward Contracts (2)

Not standardized contracts as they are not traded on an exchange
They entail counterparty risks
They are can be tailored to specific needs of counterparties
They involve lower transaction costs
Fair value of forward contract:
Notional x
amount
(Current forward rate contracted forward rate)

t
(1+r)
where
Contracted forward rate is forward rate
fixed at inception
r = discount rate
Current forward rate is forward rate for

remaining period to maturity
t = period to maturity
Forward Contracts: Journal Entries

At inception
No journal entry
as fair value is nil
During life of contract
Closing position or
at expiration*
Dr Forward Contract
(asset)
Cr Gain on forward
contract
Dr Cash
Cr Forward contract
or
Dr Loss on forward
contract
Cr Forward Contract
(liability)
Dr Forward contract
Adjust fair value and

record gain/loss
Close out and record

net settlement of
contract
Cr Cash
* Its also required the journals to adjust fair value and settlement of underlying at expiration.
Forward Contracts : illustration

Example
Example
On March 1, 20X5, Company A entered into a forward contract

with a foreign exchange dealer to buy 1 million foreign currency
(FC 1,000,000) for delivery on May 30, 20X5. Following
exchange rates are given:
Date
Spot rate
$/FC
May 30 forward rate

$/FC
March 1
$1.185
$1.20
March 31
1.19
1.21
April 30
1.20
1.205
May 30
1.215
1.215
Forward Contracts: illustration (2)

Example
Example
Date
March 1
Account
Amount
No Entry
Fair value of forward contract is zero at inception
March 31 Dr Forward Contract (asset)

Cr
Gain on Forward Contract
April 30
May 30
10,000
10,000
To record change in fair value of forward contract
(1.21 - 1.2) x 1,000,000
Dr Loss on Forward Contract

Cr
Forward Contract (liability)
5,000
(1.21 - 1.205) x 1,000,000
Dr Forward Contract (asset)

Cr
10,000
(1.215 - 1.205) x 1,000,000
Dr Cash
Cr
Forward Contract
To close forward contract at maturity
Dr Foreign Currency
Cr
Cash
To record settlement of underlying
5,000
10,000
15,000
15,000
(1.2 - 1.215) x 1,000,000
1,215,000
1,215,000
1.215 x 1,000,000
When forward contracts fall due more than 12 months after the reporting period, they should be
discounted.
Forward Contracts: illustration (3)

Example
Example
Alternative journal entries:

Date
March 1
Account
Amount
No Entry
Fair value of forward contract is zero at inception
March 31 Dr Forward Contract (asset)

Cr
April 30
May 30
10,000
10,000
(1.21 - 1.2) x 1,000,000
Dr Loss on Forward Contract

Cr
Forward Contract (liability)
5,000
(1.21 - 1.205) x 1,000,000
Dr Forward Contract (asset)

Cr
10,000
(1.215 - 1.205) x 1,000,000
Dr Foreign Currency
Cr
Cash
Cr
Forward Contract
5,000
10,000
1,215,000
1,200,000
15,000*
*(1.2 - 1.215) x 1,000,000
Futures Contracts
A future contract is similar to a forward contract except that it is
a standardized contract and is traded on an exchange.
Futures contracts are marked-to-market and settled on a daily
basis.
Futures contracts require payment of a margin deposit which
has to be maintained throughout the contract period.
Margin account is not part of initial investment but as collateral
for counterparty or clearinghouse.
Margin accounts are separate assets and accounted separately.
Wide range of exchange-traded future contracts:
Commodity futures
Interest rate futures
Currency futures
Futures Contracts: Journal Entries

At inception
Dr Margin deposit
Cr Cash
During life of contract
Closing position or
at expiration*
Dr Futures Contract
Cr Gain on future
contract
Dr Cash
Dr Gain on future
contract
Cr Margin deposit
or
Dr Loss on future
contract
Cr Futures Contract
Record payment of
initial margin deposit
Record daily settlement of

future contracts
Dr Cash
Cr Loss on future
contract
Cr Margin deposit
Close out and and recover
margin deposit
Futures Contracts : illustration

Example
Example
On March 1, 20X5, Company A speculates that the price of gold

will increase and purchases 10 gold futures contracts at a price of
$800/ounce. Each contract is for 100 ounces of gold and maturity
date is May 30. The futures exchange requires a payment of 10%
of notional amount as margin deposit. Following prices are given:
Date
Price/ounce
May 30 futures
price/ounce
March 1
$798
$800
March 31
797
799
April 30
799
801
May 30
802
802
Futures Contracts: illustration (2)

Date
March 1
Account
Dr Margin Deposit
Cr
Cash
80,000
To record payment of margin deposit
10% x $800,000
March 31 Dr Loss on Futures Contract

Cr
Futures Contract
April 30
May 30
Amount
80,000
1,000
1,000
To record settlement or change in fair value
(800 - 799) x 100 x 10
Dr Futures Contract
Cr
Gain on Futures Contract
2,000
(801 - 799) x 100 x 10
Dr Cash
Dr Futures Contract
Cr
Cr
Margin Deposit
80,000
1,000
To record change in fair value and return of margin
(802 - 801) x 100 x 10
Dr Gold
Cr
Cash
Cr
Futures Contract
To record settlement and close futures contract
2,000
1,000
80,000
802,000
800,000
2,000**
**(802 - 800) x 100 x 10
Futures Contracts: illustration (3)

Example
Example
Alternative journal entries:

Date
March 1
Account
Dr Margin Deposit
Cr
Cash
80,000
To record payment of margin deposit
10% x $800,000
March 31 Dr Loss on Futures Contract

Cr
Futures Contract
April 30
May 30
Amount
80,000
1,000
1,000
(800 - 799) x 100 x 10
Dr Futures Contract
Cr
2,000
(801 - 799) x 100 x 10
Dr Futures Contract
Cr
1,000
(802 - 801) x 100 x 10
Dr Gold
Cr
Margin deposit
Cr
Cash
Cr
Futures Contract
2,000
1,000
802,000
80,000
720,000
2,000**
**(802 - 800) x 100 x 10
Hedging
Propose is to neutralize an exposed risk
Loss on hedge item offset by gain on hedging instrument
Reduce volatility than preserve gains
Other ways of hedging through non-derivative

derivatives
Money market instruments (money market hedge)
Natural hedge (offsetting foreign currency assets and
liability in the same currency)
Special accounting rules called hedge accounting

applies when derivatives are used for hedging
purposes
Rationale of Hedge Accounting

Arises because of the mismatch of incomeoffsetting effect between hedged item and hedging
instrument
Situations requiring hedge accounting:
Hedge item and hedging instrument are measured using
different bases (One is at cost while the other is at fair
value)
Hedged item yet to be recognized in financial statement
Different treatment for changes in fair value (changes
taken to equity while the other is taken to income
statement)
Risks That Qualify for Hedge Accounting
Interest rate risk
Foreign exchange risk
Specific risks
that qualify for
hedge accounting
Risks must be specific risk,

not general business risks
Price risk
Credit risk
Possible for a derivative to

hedge more than one risk
Qualifying Hedging Instruments and

Hedged Items
Instruments that qualify as hedging instruments include:
Designated derivatives (except written options).
Embedded Derivatives.
Designated non-derivatives financial asset/ liability that hedge
foreign exchange risks only.
Instruments that qualify as hedged items include:

Financial assets and liabilities with exposure to changes in fair
value.
Non-financial assets exposed to foreign exchange or price risks.
Firm commitment.
Highly probable forecast transaction with exposures to future cash
flows.
Net investment in foreign entity.
Assessing Hedge Effectiveness

During the duration of hedge, hedge effectiveness is
assessed on dollar-offset method:
Hedge effectiveness ratio (HER):
Hedge effectiveness Changes in fair value or future cash flow of hedging instrument
=
(or delta ratio)
Changes in fair value or future cash flow of hedged item
0.8
1.25
Effective hedge
Classification of Hedging
Fair value
hedge
Cash flow
hedge
Hedge of a net
investment in a
foreign entity
Hedge of the exposure to changes in fair value of a

recognized asset or liability or an unrecognized firm
commitment, or an identified portion of such asset, liability
or firm commitment, which is attributable to a particular
risk and could affect profit or loss.
Hedge of the exposure to variability in cash flows that
(i) is attributable to a particular risk associated with a
recognized asset or liability (such as all or some future
interest payment on variable debt instrument )or a highly
probable future transaction, and
(ii) could affect profit or loss.
Hedge of the foreign currency risk associated with a
foreign operation whose financial statements are required
to be translated into the presentation currency of the
parent company.
Classification of Hedging (2)

The designation of a derivative as a fair value
hedge or a cash flow hedge is determined by the
hedged risk, that is, whether the entity has a fair
value exposure or a cash flow exposure.
An exception where a derivative can be designated
as either a fair value hedge or a cash flow hedge is
where the hedged risk is the foreign exchange risk
of a firm commitment.
Accounting for a Fair Value Hedge
Hedged Item (recognized asset

or liability or firm commitment)
Hedging Instruments
Change in fair value
Change in fair value

Income statement
Gain (loss) on hedging instrument
offset loss (gain) on hedged item
Balance sheet
Change in fair value adjusted
against carrying amount
Change in fair value adjusted

against carrying amount
Fair Value Hedge Forward Contract

Example
Example
Ilustration:
31/10/20X3
Inventory of 10,000 ounces of gold
Carried at cost of $3,000,000 ($300 per ounce)
Price of gold was $352 per ounce
1/11/20X3
Sold forward contract on 10,000 ounce for forward
price of $350 ounce
Forward contract matures on 31/3/20X4
Date
Spot Rate
March 31 Forward Rate
Nov 1, 20X3
$352
$350
Dec 31, 20X3
342
340
March 31, 20X4
330
330
Fair Value Hedge Forward Contract (2)

Example
Example
1/10/20X1
No entry or just a memorandum entry as the fair value of the forward contract
is nil
31/12/20X3
Dr
Forward contract .
Cr
Gain on forward contract ...
100,000
100,000
Gain on forward contract: 10,000 x ($340 -$350)

Taken to income statement
Dr
Loss on inventory
Cr
Inventory ..
100,000
Gain on forward contract: 10,000 x ($342 - $352)
100,000

Example
Example
31/3/20X4
Inventory is sold to third-party at $330 per ounce (also maturity date of
forward contract
Dr
Forward contract .
Cr
Gain on forward contract ...
100,000
100,000
Gain on forward contract: 10,000 x ($330 -$340)
Dr
Loss on inventory
Cr
Inventory ..
120,000
120,000
Loss on forward contract: 10,000 x ($330 - $342)
Dr
Cash ..
Cr
Sales .
3,300,000
Sale of inventory: 10,000 x $330

3,300,000

Example
Example
31/3/20X4
Dr
Cost of Good Sold
Cr
Inventory .........................
2,780,000
2,780,000
Cost of Good Sold: $3,000,000 - $100,000 - $120,000
Dr
Cash ..................
Cr
Forward Contract .....
200,000
200,000
Close forward contract and record net receipt on settlement:

10,000 x ($350 - $330)

Example
Example
31/3/20X4
If inventory is NOT sold to third-party but SETTLED at maturity date
Dr
Inventory .
Cr
Gain on inventory ...
520,000
520,000
Gain on inventory at inception: 10,000 x ($352 -$300)
Dr
Cash ..................
Cr
Cr
Forward Contract .....

Inventory .......................
3,500,000
200,000
3,300,000
Close forward contract and record net receipt on settlement:

10,000 x ($350 - $330)
Accounting for a Cash Flow Hedge
Effective Cash Flow Hedge
Effective portion
of gain/ loss
Ineffective portion
of gain/ loss
Recognized directly
in equity through
statement of
changes in equity
Recognized in profit
or loss
Assessing Effective Portion of Cash Flow

Hedge
Example
Example
Lesser of
Effective
two
portion
cumulative credited/
amount in
(debited)
absolute to equity in
terms
current
(c)
period*
Ineffective
portion
credited/
(debited)
to income
statement
in current
period**
Period
ending
Cumulative
in FV of
future
contracts
(a)
Cumulative
in PV of
expected
cash flow
(b)
31/1/20x1
$100
$(105)
$100
$100
$0
28/2/20x1
190
(185)
185
85
31/3/20x1
293
(290)
290
105
(2)
30/4/20x1
255
(245)
245
(45)
* (c) - previous balance

**(a) - (c) - previous balance
Accounting for a Cash Flow Hedge (2)
Cash flow hedges are applicable to the following:

Forecasted
transactions
involving financial
and non-financial
assets/liabilities
which will result in
cash inflow/ outflow
Interest rate swaps
Other transactions
which affect future
cash flows
Cash Flow Hedge Futures Contract

Example
Example
Ilustration:
1/10/20X1
Inventory of 5,000,000 ounces of silver.
Carried at cost of $15,000,000 ($3 per ounce).
Price of silver was $3.3 per ounce
Sold futures contract on 5,000,000 ounce for $3.21
/ounce.
Futures contract matures on 31/3/20X2.
Required
deposit
was $0.03
per
ounce.
DatemarginSpot
Price/ounce
March 31
Futures
Price
Oct 1, 20X1
$3.30
$3.21
Dec 31, 20X1
3.265
3.17
Feb 28, 20X2
3.15
3.05
March 31, 20X2
3.10
3.00
Cash Flow Hedge Futures Contract (2)

Example
Example
Calculation of expected cash flows & fair value of futures contract

Example
Example
Period-to-period & cumulative hedge effectiveness assessment

Example
Example
Determination of effective and ineffective portions of a cash flow hedge
Period
ending
Cumulative Cumulative
in FV of
in PV of
future
expected
contracts
cash flow
(a)
(b)
Lesser of
two
cumulative
amount in
absolute
terms
(c)
Effective
portion
credited/
(debited) to
equity in
current
period*
Ineffective
portion
credited/
(debited)
to income
statement
in current
period**
31/12/X1
200,000
(175,000)
175,000
175,000
25,000
28/2/X2
800,000
(750,000)
750,000
575,000
25,000
31/3/X2
1,050,000
(1,000,000)
1,000,000
250,000
* (c) - previous balance

**(a) - (c) - previous balance

Example
Example
1/10/20X1
Dr
Margin deposit
Cr
Cash .................................
150,000
150,000
Margin deposit: $0.03 x 5,000,000 ounce
31/12/20X1
Dr
Futures contract ..
200,000
Cr
OCI Hedge reserve .......
175,000
Cr
Gain on futures contract ...
25,000
Record fair value adjustment of futures contract
28/2/20X2
Dr
Futures contract ..
600,000
Cr
575,000
Cr
Gain on futures contract ...
25,000


Example
Example
31/3/20X2
Dr
Futures contract ..
Cr
250,000
250,000
Dr
Cash ..
Cr
Sales .
15,500,000
15,500,000
Sale of inventory: 5,000,000 x $3.1
Dr
Cost of Good Sold
Cr
Inventory .........................
15,000,000
15,000,000
Cost of Good Sold at carried cost
Dr
Cr
Sales/ Cost of Good Sold ..
1,000,000
To recycle hedging reserve against Profit & Loss

1,000,000

Example
Example
31/3/20X2
Dr
Cash ..................
1,200,000
Cr
Margin deposit ................
150,000
Cr
Futures Contract ......
1,050,000
Close the futures contract and record receipt of margin
Sources
:
Tan & Lee Advanced Financial Accounting.
Lam & Lau Intermediate Financial
Reporting 2nd Ed.
Baker, Christensen, Cottrell Advanced
Financial Accounting 10th Ed.
@Taufik_FEUI

Advanced Accounting

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Advanced Accounting

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Session 1 and

Accounting for Derivative

Edited by Taufik Hidayat

Financial Intruments and Derivative.

Edited by Taufik Hidayat

Edited by Taufik Hidayat

Financial Instruments (2)

Financial Instruments (3)

is a financial instrument or other contract within the

a) its value changes in response to the change in a specified

b) it requires no initial net investment or an initial net

c) it is settled at a future date.

Edited by Taufik Hidayat

Edited by Taufik Hidayat

Derivative Instruments (2)

Producers, trading firms,

Edited by Taufik Hidayat

Derivative Instruments (3)

Compound Financial Instrument

Edited by Taufik Hidayat

Compound Financial Instrument

Initial Recognition (2)

date that an asset is delivered

These criteria imply an entity to recognise financial asset or

Edited by Taufik Hidayat

Initial Recognition (3)

PSAK 55 specifically states that a contract that requires or

Initial Measurement (2)

Edited by Taufik Hidayat

Financial instrument at fair value through profit or loss

Derecognition of a Financial Asset

Edited by Taufik Hidayat

Derecognition of a Financial Liability

A financial liability or part of it is extinguished when the

Forward sales contract

Forward purchase contract

Forward Contracts (2)

Fair value of forward contract:

(Current forward rate contracted forward rate)

Current forward rate is forward rate for

Edited by Taufik Hidayat

Forward Contracts: Journal Entries

During life of contract

Adjust fair value and

Close out and record

Forward Contracts : illustration

On March 1, 20X5, Company A entered into a forward contract

May 30 forward rate

Edited by Taufik Hidayat

Forward Contracts: illustration (2)

March 31 Dr Forward Contract (asset)

To record change in fair value of forward contract

(1.21 - 1.2) x 1,000,000

Dr Loss on Forward Contract

To record change in fair value of forward contract

(1.21 - 1.205) x 1,000,000

Dr Forward Contract (asset)

To record change in fair value of forward contract

(1.215 - 1.205) x 1,000,000

Forward Contracts: illustration (3)

Alternative journal entries:

March 31 Dr Forward Contract (asset)

To record change in fair value of forward contract

(1.21 - 1.2) x 1,000,000