Euromoney Audit Training

This accounting for derivatives financial training course is designed to give practitioners a good grounding on the fundamentals of derivatives and other financial instruments, how they are valued and more importantly, how they should appear on the financial statements.

Featuring:

• Practical impact of IAS 39 and FASB 133 on derivatives transactions
• Typical hedging challenges: what doesn't work anymore?
• Transition adjustment: when should repair work be done?
• Simple solutions that allow some P&L volatility
• Market and credit risk management techniques
• Practical examples from Parmalat, Freddie Mac and Enron

Course Background

By far the most complex and controversial accounting standards ever to be issued are IAS 39 and FASB 133. In the UK alone it is estimated that listed companies will have to spend up to £500m in order to comply with the new accounting standards coming into force across Europe in 2005. Companies with market capitalisations of over £2bn will spend at least £1m each to ensure their treasury systems meet the requirements of the new rules on derivatives and other financial instruments listed in IAS 39. IAS 39 and its fair value treatment of hedging will mean that many hedges will no longer be eligible for hedge accounting. Rather than allow hedges where changes in fair value or cash flows of the hedged item have to be between 80% to 125%, the IASB is now expected to limit hedge accounting to a 95% to 105% range. Companies will be confronted with the challenge of finding derivatives that exactly match this in terms of amounts, tenure, and interest rates. The change from the 80% to 125% range, has removed an important degree of flexibility, making it much more difficult for companies to allocate external derivatives against external assets or liabilities for hedging purposes. Although many companies and banks may find these standards difficult to implement, it is nevertheless important that derivative practitioners become fully conversant with their requirements, implementation and more importantly, potential weaknesses with the standards.

Practical Emphasis

This financial training course is designed to deal with specific questions about FASB 133 and IAS 39 and equip you with the practical tools to analyse and understand various transactions. Euromoney Training courses are very interactive and provide a forum in which delegates can share their experiences. At the end of the course, you will have a firm understanding of the most popular financial instruments and how they impact your risk strategies. The programme relies on practical examples and case studies to ensure that, by the end of the course, you are fully competent to understand and implement hedging strategies.

Case Studies

The course includes practical examples and case studies from Parmalat, Freddie Mac and Enron. Most of the case studies will be carried out using computer simulations. Delegates will have an opportunity to use Excel spreadsheets to value various derivative products as well as prepare calculations for journal entry and accounting systems purposes

Who Should Attend

• Derivative sales executives
• Risk managers
• Accountants
• Auditors
• Senior operations managers
• Strategists and financial planners
  

Day 1

Background and structure of company accounts

• Overview of profit and loss account
• Overview of balance sheet
• Cash flow statement
• Disclosures
• Notes to the accounts

Overview of financial instrument accounting standards

• Why were the standards devised?
• Off balance sheet abuse and their consequences
• How FASB and IAS intend to cope with these abuses
• How do accounting standards contribute to hedging?
• Market and treasury vs. accounting risk

Why financial instruments are necessary

• Cross currency swaps
• Interest rate swaps
• Swaptions
• Options
• Bond futures
• Index swaps

Accounting for future and forward contracts

• Initial and variation margin
• Differentiate and understand the distinction between futures and forwards contracts
• Identify problems affiliated with using futures for hedging
• Tick points
• Basis risk

Day 2

Development of accounting standards

• FASB vs. International Accounting Standards
• Understanding the distinction between hedge and trade accounting
• Learning how to apply marking to market principles
• Analysing the role of the Statement of Total Gains and Realised Losses

Fair value & cash flow hedge accounting

• Identifying ineffectiveness
• Splitting a hedge between effectiveness and ineffectiveness
• Excluding spot forward differential
• Addressing documentation issues

Embedded derivatives and structured products

• Breaking down contracts between vanilla bonds and derivatives
• Interest rate exposure
• Regular ways vs. derivative transactions
• Guidance on when to break down structured instruments

How traders price derivatives

• Using market data to price derivatives
• Learning the basics about spot and forward rates of interest
• Present value and future value
• Pricing derivatives on the basis of hedge costs

Dealing with structured products, exotic and credit derivatives

• Development of market
• Marking to market products
• Hedge vs. trade accounting
• Use of the OCI/STRGL accounts

Day 3

Market and credit risk management techniques

• Measuring market risk and credit risk on a portfolio basis
• Volatility - as measured by Value at Risk
• Hedging exposures as opposed to hedging assets and liabilities
• Portfolio risk hedging vs. accounting risk hedging - understanding the issues

Documentation processes that qualify for hedge accounting

• Effective hedging
• Matters to appear in documentation
• Regression analysis
• Testing for effectiveness - 80% / 125% rule

FASB and securitisation

• Benefits of securitisation
• Determining the difficulty from hedging with plain vanilla swaps
• Understanding the use of tailor made amortising swaps
• Constructing amortisation swaps from plain vanilla swaps
• Present value basis point calculations

Dealing with credit risk

• Measuring credit risk
• Basel committee on methods to measure credit risk
• Credit derivatives
• Total return swaps and credit default swaps
• How the accounting standards deal with credit derivatives

Course summary and close

• Cormac Butler

  Cormac Butler is currently an active equity and options trader and a former consultant with Lombard Risk Systems London and has also worked with Peat Marwick and PricewaterhouseCoopers. He has considerable international experience as a training consultant in derivative accounting, Corporate Finance and Derivative Mathematics, working with major banks including Banque BNP Paribas. He has conducted in-house courses Morgan Stanley, PriceWaterhouseCoopers (Holland), Investec (South Africa) and ABB Switzerland and Asian Development Bank. In addition, he has worked for IIR and Euromoney in Singapore, Hong Kong, Thailand, America and Saudi Arabia. Cormac graduated from the University of Limerick, Ireland with a degree in Finance He has recently published Mastering Value at Risk (Financial Times Pitman) which is currently on the best sellers list (for Risk Management books) with Amazon.com, Gloriamundi.org and Financial World Bookshop (London). He has also published Accounting for Financial Instruments by Wiley.

  Courses run by this instructor

  • Treasury Risk Management - Dubai

Interested in holding this course in-house? Please fill out your details and a member of our team will be in touch with more information.

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