Wednesday, May 21, 2014

Accounting for derivatives - things to take note

Derivatives are financial instruments recognised as fair value through profit or loss. The contractual term for some derivatives is more than one year.

For instance, interest rate swaps for a non-current loan is typically more than one year - hence, the fair value includes current and non-current portion. Management should assess and determine the current and non-current portion of these derivatives on balance sheet appropriately. This is one of the items to take note.

Also, we also have to disclose the notional amount of the derivative contracts in the financial statement. For instance, the interest rate swap is entered into to hedge a loan amonut of S$10million. This would be the notional amount to be disclosed. This would assist the financial statement user to understand how many % of the loan has been hedged with the derivatives

Besides the points above, the fair value of the derivatives should not be offset against each other. For instance, one derivative contract is in asset position, while the other derivative contract is in liability position as at year-end. These contracts should not be offset against each other on the balance sheet.

Please feel free to contact us if you need clarification on the accounting for derivatives at myauditing@gmail.com

No comments: