中级会计学英文版课件：ch14 Complex Financial Instruments

1、14 - 1Copyright 2014 Pearson Canada Inc.Chapter 14Complex Financial Instruments14 - 2Copyright 2014 Pearson Canada Inc.LEARNING OBJECTIVESL.O 14-1. Describe the nature of standard nancial instruments, derivatives, and compound nancial instruments, and identify when transactions involve such instrume

2、nts. L.O. 14-2. Apply the accounting standards for derivatives. L.O. 14-3. Apply the accounting standards for compound nancial instruments from the perspective of the issuer. 14 - 3Copyright 2014 Pearson Canada Inc.LEARNING OBJECTIVES (Continued)L.O. 14-4. Apply the accounting standards for employee

3、 stock options from the perspective of the issuer. L.O. 14-5. Describe the nature of hedges and identify situations in which hedge accounting may be appropriate. 14 - 4Copyright 2014 Pearson Canada Inc.A. INTRODUCTIONAccounting for financial instruments is complexAccounting standards for CFI are con

4、tinuously reviewed and revised as new instruments emerge.New financial instruments are innovative ways to meet financial market needsSubstance over form key in accounting for these instruments as some CFIs are designed for desired accounting results.B. TYPES OF FINANCIAL INSTRUMENTS (L.O.14-1)Three

5、major types:1. Basic financial assets, financial liabilities, and equity instruments2. Derivatives 3. Compound financial instruments Copyright 2014 Pearson Canada Inc.14 - 51. Basic financial assets, financial liabilities, and equity instrumentsCopyright 2014 Pearson Canada Inc.14 - 6Accounting for

6、these are summarized in Exhibit 14-1 2. Derivative financial instruments Derivative - a financial instrument that is derived from some other underlying quantityUnderlying quantity or underlying - value of an asset, an index value, or an event that helps determine the value of a derivativeDoes not ha

7、ve to be financial in nature14 - 7Copyright 2014 Pearson Canada Inc.Derivative financial instruments (continued)Derivatives are used to: hedge, or speculateHedging uses derivatives to mitigate a perceived risk Speculation acts to profit from an identified riskThere are five types of common derivativ

8、es, namely:OptionsWarrantsForwardsFuturesSwaps 14 - 8Copyright 2014 Pearson Canada Inc.Five Types of common derivativesa. Options - An option is a derivative contract that gives the holder the right, but not the obligation, to buy or sell an underlying nancial instrument at a specied priceA call opt

9、ion gives the right to buyMost common type of optionAn important example is the employee stock optionA put option provides the right to sellCopyright 2014 Pearson Canada Inc.14 - 9Options (Continued)Out-of-the-money - value of the underlying instrument in an option contract is unfavourable to the ho

10、lder exercising the option compared with letting the option expireFor example: Call option underlying price lower than strike price (SK) (market price greater than exercise price)14 - 10Copyright 2014 Pearson Canada Inc.Options (Continued)In-the-money - value of the underlying instrument in an optio

11、n contract is favourable to the holder exercising the option compared with letting the option expireFor example: Call option underlying price exceeds strike price (SK) (market price greater than exercise price)For example: Put option underlying price below strike price (SK) (market price less than e

12、xercise price)Copyright 2014 Pearson Canada Inc.14 - 11Options (Continued)The value of an option (V) has two parts: (i) intrinsic value, and (ii) time value.Intrinsic value - in a call option - the greater of zero and the difference between the market price and the strike price (S K).Time value of a

13、n option - portion of an options value that reects the probability that the future market price of the underlying instrument will exceed the strike priceCopyright 2014 Pearson Canada Inc.14 - 12Options (Continued)Employee Stock Option An option a company issues to its employees, giving them the righ

14、t to buy shares in the enterprise at a pre-specied priceAn important example of a call optionSometimes given as a form of compensationSometimes given to reduce moral hazard Copyright 2014 Pearson Canada Inc.14 - 13Options (Continued)Copyright 2014 Pearson Canada Inc.14 - 14Five types of common deriv

15、atives (Continued)b. Warrants - right but not the obligation to buy a share at a specied price over a specied period of time.Can be considered a type of call optionIssued only by company whose shares are the underlying instrument Longer time to maturity compared to optionsOften issued in combination

16、 with other financial instruments (such as bonds and shares)14 - 15Copyright 2014 Pearson Canada Inc.Five types of common derivatives (Continued)c. Forwards - A forward is a contract in which one party commits upfront to buy or sell something at a dened price at a dened future dateNo choice in the p

17、urchase or sale (unlike an option)Possible only if parties have different expectations or risk tolerances about future price changesVery flexible compared to futures Copyright 2014 Pearson Canada Inc.14 - 16Five types of common derivatives (Continued)d. Futures - similar to a forward but contract is

18、 written in more standardized terms - For example: prices, maturity datesInvolves commonly traded items For example: commodities, currenciesFutures trade in organized markets14 - 17Copyright 2014 Pearson Canada Inc.Five types of common derivatives (Continued)e. Swaps - A swap is a derivative contrac

19、t in which two parties agree to exchange cash owsDependent on one party wanting the cash flow stream of the other partyCopyright 2014 Pearson Canada Inc.14 - 183. Compound financial instrumentsCompound nancial instruments have more than one nancial instrument componentInclude convertible bonds, shar

20、es with attached warrantsUsed when companies need “staged financing”Conversion features and warrants are “sweeteners”“Sweeteners” enhance sale of underlying instruments. CFIs allow indirect issuance of additional sharesCFIs suitable and commonly used when operational uncertainty is relatively high (

21、start-ups, mining) Copyright 2014 Pearson Canada Inc.14 - 19REVIEW CHECKPOINTS CP14-1 to CP14-8 Copyright 2014 Pearson Canada Inc.14 - 20C. ACCOUNTING FOR COMPLEX FINANCIAL INSTRUMENTS (L.O. 14-2)Often involves one or more equity componentsIFRS not specific regarding which equity accounts to useEqui

22、ty accounts defined in ASPE used as reference 14 - 21Copyright 2014 Pearson Canada Inc.1. Derivatives (L.O. 14-2) Held-for-trading investments measure at fair value value changes through income statementHedging transactions treated differently below in section DDerivatives that relate to the entitys

23、 own equity recorded at historical costCopyright 2014 Pearson Canada Inc.14 - 22See Exhibits 14-5, 14-6 and 14-7 for journal entries2. Compound financial instruments (L.O. 14-3)a. Issuance separate and account for each component separatelyAllocation to each component:(i) Proportional method estimate

24、 fair value of each component and allocate proportionately(ii) Incremental method estimate fair value of each component and allocate in descending order of reliability based on fair value(iii) Zero common equity method assign zero value to the common equity component IFRS recommends (ii) with debt v

25、alued firstASPE permits (ii) and (iii)14 - 23Copyright 2014 Pearson Canada Inc.See Exhibit 14-8 for accounting illustrations2. Compound financial instruments (L.O. 14-3) (Continued) b. Measurement at the balance sheet dateApply the accounting related to each componentFor example: for a convertible b

26、ond, report A financial liability for a convertible bond at amortized costThe contributed surplus for the conversion option in equity at historical cost.Copyright 2014 Pearson Canada Inc.14 - 242. Compound financial instruments (L.O. 14-3) (Continued) c. Accounting for an exercise of options or warr

27、antsExtinguishes the financial instrument in exchange for the issuance of common sharesAmount recorded in common stock = cash received + amount removed from contributed surplus14 - 25Copyright 2014 Pearson Canada Inc.See Exhibit 14-9 for journal entry2. Compound financial instruments (L.O. 14-3) (Co

28、ntinued) d. Accounting for conversion of bonds and preferred sharesWhen converting into equity (e.g. common shares) two conceptual methods are available: Book value no gain or loss on conversion Market value - difference recognized in net income Both IFRS and ASPE mandate use of book value methodCop

29、yright 2014 Pearson Canada Inc.See Exhibit 14-10 & 11 for journal entries14 - 26Copyright 2014 Pearson Canada Inc.14 - 27See Exhibit 14-13 for journal entry3. Stock compensation plans (L.O. 14-4)A common form of employee compensationIntended to encourage alignment of employee and company interestsTw

30、o common stock compensation plans are:Employee stock optionsStock Appreciation rights (SARS)Issues in accounting for stock compensation plans: How to value options and SARSWhen to expense options and SARS costsHow to account for the exercise and expiration of SARS.14 - 28Copyright 2014 Pearson Canad

31、a Inc.Stock compensation plans (continued)a. Value of stock options use stock options fair value at grant dateFair value include = intrinsic value + time value (required by both IFRS and ASPE) fair value may be determined using Black-Scholes or other techniques14 - 29Copyright 2014 Pearson Canada In

32、c.Stock compensation plans (continued)b. Expense recognitionValue determined on grant date, and allocated as expense over the vesting periodVesting period is minimum time option must be held before it can be exercisedOptions can be exercised immediately? Fully expense in period granted (no vesting p

33、eriod). 14 - 30Copyright 2014 Pearson Canada Inc.See Exhibits14-14 & 15Stock compensation plans (continued)c. Accounting for the exercise and expiration of optionsExercised: record: cash received, reduction of contributed surplus, increase in common sharesExpired: transfer from contributed surplus -

34、 stock options, to contributed surplus - expired stock options 14 - 31Copyright 2014 Pearson Canada Inc.See Exhibits 14-16 & 17Stock compensation plans (L.O. 14-4)(continued)d. Employee Stock options illustratedExhibits 14-15 to 14-17 illustrate accounting for employee stock options 14 - 32Copyright

35、 2014 Pearson Canada Inc.See Exhibits 14-15,16, & 17Stock compensation plans (continued)e. Cash settled stock appreciation rightsEmployee receives difference between market price at the settlement date and benchmark price if share price increases.SARs may be settled in cash, and cash or shares, depe

36、nding on terms.SARS expense allocated over vesting periodExpense adjusted for price changes during exercise period 14 - 33Copyright 2014 Pearson Canada Inc.Cash settled stock appreciation rights (continued)IFRS - expense is based on fair value of SARS, ASPE expense is based on market price.Determini

37、ng periods compensation expense: 1. percentage to accrue: time since grant date vesting period 2. liability at periods end: fair value of SARs x number of SARs x percent in (1) above. 3. compare liability at periods end to beginning. If liability increased, debit compensation expense, credit obligat

38、ion with increase; if liability decreased, debit liability and credit compensation expense When SARs exercised, reduce obligation by cash paid.14 - 34Copyright 2014 Pearson Canada Inc.See Exhibits 14-19 to 14-2214 - 35Copyright 2014 Pearson Canada Inc.Stock compensation plans (continued)Stock apprec

39、iation rights with multiple settlement optionsIf employees can choose cash or shares, a compound instrument has been issued; allocate fair value to its debt and equity componentsIf company determines form of settlement, then normally account for arrangement as equity-settled share-based payments (st

40、ock options). 14 - 36Copyright 2014 Pearson Canada Inc.D. HEDGING (L.O. 14-5)1. OverviewHedging is a risk management strategy by parties with opposing risk preferences on fluctuating items Hedge accounting is specific to hedging activitiesHedged item is item being protected from value changesHedging

41、 item is the financial instrument used to protect the hedged item Copyright 2014 Pearson Canada Inc.14 - 37HEDGING (continued)1. Overview (continued)Generally, one item hedges another if their values move in opposite directionA hedge can be a:Fair value hedge Reduces an assets exposure to changes in

42、 fair valueCash flow hedge nancial instrument that reduces exposure to changes in future cash ows Copyright 2014 Pearson Canada Inc.14 - 38Hedge accounting allows gains/losses on hedged item and hedging instrument to be treated the same way in the same periodEffects offset, at least partiallyFair va

43、lue hedges changes for the hedged item and hedging instrument ow through incomeCash ow hedges changes in fair value ow pass through OCICopyright 2014 Pearson Canada Inc.14 - 391. Overview (continued)HEDGING (continued)Manner of recording transactions not mandatedTwo methods evolved:Gross Method, and

44、 Net MethodNet method more common in practice; used in illustrations Copyright 2014 Pearson Canada Inc.14 - 402. Hedge AccountingReduce firms exposure to fair value changes in an asset, liability or firm commitment, foreign currency denominated receivablesAvailable for sale marketable securitiesfore

45、ign currency denominated trade payableforeign currency denominated bonds payableReported at exchange rate specified in agreementA foreign currency risk hedge may be accounted for as a fair value hedge or a cash flow hedgeCopyright 2014 Pearson Canada Inc.14 - 413. Fair Value HedgesSee Exhibit 14-24Reduce firms exposure to changes in future cash flows, including highly probable forecast transactions Future interest payments on variable rate debtIntere