Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
Accounting for Derivatives
Pertemuan 19-20
Derivatives (def.)
• Derivative is a name given to a broad range of
financial securities.
• The derivative contract's value to the investor is
– Directly related to fluctuations in price, rate or some other
variable
– That underlies it.
• Typical derivative instruments
– Option contracts
– Forward contracts
– Futures contracts
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Types of Derivatives - Forward Contracts
Forward contracts
– Negotiated contracts between two parties
– For the delivery or purchase of
• A commodity or
• A foreign currency
– At an agreed upon price, quantity, and delivery date.
• Settlement of the forward contract may be
– Physical delivery of the good, or
– Net settlement
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Types of Derivatives - Futures Contracts
• Futures contracts are specific type of forward
contracts
– Characteristics are standardized
– Characteristics are set by futures exchanges
• Rather than by the contracting parties
– Exchange guarantees performance
• Settlement may also be made by entering another
futures contract in the opposite direction
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Types of Derivatives - Options
• With options, only one party is obligated to perform
• The other party has
– Ability,
– But not obligation to perform
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Using Derivatives as Hedges
• A hedge can
– Shift risk of fluctuations in sales prices, costs, interest rates,
currency exchange rates
– Help manage costs
– Reduce risks to improve financial position
– Produce tax benefits
– Help avoid bankruptcy
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Hedge Accounting
• At inception, document the hedge
– Relationship between hedged item and derivative instrument
– Risk management objective and strategy for hedge
•
•
•
•
Hedged instrument
Hedged item
Nature of risk being hedged
Means of assessing effectiveness
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Hedge Effectiveness
To qualify for hedge accounting, the derivative
instrument must be
– Highly effective in offsetting
– Gains or losses
– In the item being hedged
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Critical Term Analysis
• Effectiveness considers
–
–
–
–
–
Nature of the underlying variable
Notional amount
Item being hedged
Delivery date of derivative
Settlement date of the underlying
• If critical terms are identical, effectiveness is assumed
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Example of Effectiveness
• Item to be hedged
–
–
–
–
Accounts payable
Due January 1, 2007
For delivery of 10,000 euros
Variable is the changing value of euros
• Hedge instrument
– Forward contract
– To accept delivery of 10,000 euros
– On January 1, 2007
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Statistical Analysis
• If critical terms of item to be hedged and hedge
instrument do not match
• Statistical analysis can determine effectiveness
– Regression analysis
– Correlation analysis
• Example
– Using derivatives based on heating oil or crude oil to hedge
jet fuel costs
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Cash Flow Hedge
• Hedges
– Anticipated or forecasted transactions
• Hedges exposure to variability in expected future
cash flows associated with a risk.
• Hedged risk
– Variability in expected future cash flows
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Accounting for Cash Flow Hedge
• Hedge instrument is recorded at cost
• Adjust to fair value
• Change in fair value is recorded as Other
Comprehensive Income (OCI)
• When the forecasted transaction impacts the income
statement
– Reclassify OCI to the hedged revenue or expense account
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Cash Flow Hedge Example: Fuel
Utility anticipates purchasing oil for sale to its customers
next February. On Dec. 1 Utility enters a futures
contract to acquire 4,200 gallons of oil at $1.4007 per
gallon for delivery on Jan. 31. A margin of $10 is to be
paid up front.
On Dec. 31, the price for delivery of oil on Jan. 31 is
$1.4050.
On Jan. 31, the spot rate for current delivery is $1.3995.
Utility settles the contract, accepting delivery of 4,200
gallons of oil.
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Hedge: Fuel (cont.)
• In Feb. Utility sells all the oil to its customers for
$8,400 and reclassifies its OCI from the hedge as
cost of sales. Pertinent rates:
Futures rate, for 1/31
Cost of 4,200 barrels
12/1
$1.4007
$5,882.94
12/31
$1.4050
$5,901.00
1/31
$1.3995
$5,877.90
• Change in futures contract to Dec. 31 = $18.06
• Change in futures contract to Jan. 31 = ($23.10)
• The loss on the contract is ($5.04) OCI, and this
serves to increase the cost of sales.
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Hedge: Fuel - Entries
Sign
contract
12/1 Futures contract
10.00
Cash
12/31 Futures contract
Adjust to
fair value
10.00
18.06
18.06
OCI
1/31 OCI
23.10
23.10
Futures contract
Settle
contract;
collect
balance on
margin.
1/31 Cash
4.96
4.96
Futures contract
1/31 Inventory
Cash
5,877.90
5,877.90
Purchase inventory.
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Hedge: Fuel – Entries cont’d
Record
the sale
and cost
of sales.
Feb. Cash
8,400.00
8,400.00
Sales
Feb. Cost of sales
5,877.90
5,877.90
Inventory
Feb. Cost of sales
OCI
5.04
5.04
The last entry reclassifies the loss on the
contract from OCI into Cost of sales. The
effect is to increase Cost of sales to
$5,882.94. This is the cost of the oil based
on the futures contract signed on Dec. 1.
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Fair Value Hedge
• Hedges
– An existing asset or liability position, or
– A firm purchase or sales commitment
• Hedged risk
– Change in the value of the asset, liability, or commitment
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Accounting for a Fair Value Hedge
• Exchange gains and losses are recognized
immediately in income
– Exchange gain or loss
• Offset by related losses and gains on the hedged item
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