:

Account
ingf
orDer
ivat
ives:

Advantages:(
1)Usef
uli
nIndAS109,(2)Aseparat
echapteri
nCAFinalonFinanci
alI
nst
rument
sisincl
uded,
(3)Fr
om Nov2008onwardswi
thoutf
ailFi
nanci
ali
nstr
umentsi
saskedin100%allat
tempt
ssometimeseven2
probl
ems.

Remembersomet ipsf order ivat ives:- Aut hor scr eat ivepoi nts:
 Mostoft heder i
vativesar eopt ions, fut ur es, forwar ds,swaps.
 Topl aywi t
ht hepr icedi fferencei sspecul ationandt or eceivegr ossdel i
veryi shedgi ng.
 Infor war dj ustcancelbuyposi tionagai nstsel landv icev ersa.Fut uresissi milart oFor war d buti tis
guarant eedbymar ginsandav ailablei nl otsi z e.Opt i
onshol derhast heopt ion/r ightt oex er cise.
 Bytaki ngabuy/sel l posi tionwej ustpr omi set obuy/sel li
nf ut ure.
 Everyopenposi ti
onhast obecl osedbysquar eof forphy si
cal del i
v ery.
 Ini
ti
allyFor war dsandSwapshav eNi li nv est ment s,Opt ionscar rysmal lpremi um andFut ur esi nvol
v es
Mar gins.
 Derivativesar emost l
yi nCommodi ties( oil,gol d),Index( Ni f
ty),St ock( Shares).
 EveryDer ivativepr obl em i sdi videdi nt o3par tsonl y:(
i)Initi
al r
ecogni ti
on,(i
i)Valuat i
on, (i
ii
)Set tl
ement .
 Most lytheAccount i
ngofder iv
at i
v eini tial l
yi sNi lexceptOpt ionspr emi um ispai d.
 Broker age/Commi ssi onpai di sj ustanexpendi turechar gedt oP/ L.I tist obesepar atedf rom
deri
v ativeent ries.
 Ini
ti
al Recogni tion:For war d=0, Fut ur es=0( Mar ginsar edeposi ts),Opt i
on=Pr emi um isr ecogni zed.
 SubsequentA/ C:InFut uresandFor war dsMTM wi l
lbewi thFut ures/For war dpr icesnotwi thspot .In
opti
onspr emi um ist r adedandP/ Lcal cul atedonchangei npr emi um aswel lasdi fferencei nMPwi th
Exercisepr i
ce.
 Allder ivati
v esgai n/l ossonVal uat ionaswel lonset tl
ementdat ei st r
ansf erredt oP/ Laccountf or
specul ation.
 Optionpr emi um f orahol deri sanAssetandnotexpenses.Si mi larlyforWr i
teri tisnotani mmedi ate
i
ncomebutaLi abi
lit
y .Li abilit
ybecausehei sexposedt ot her i
skbysel li
ngt heopt i
on.
 RememberDer ivativ
ei fnetcashset tled Fi nanci alA/ L, I
fGr oss/del iverysett l
ed Non-Fi nancial,
Iffi
xedEqui tyshar esset tled I tisanEqui tyt ransact i
on( forissuer ).
 Hedgi ngcanbedonei n2way s:( i
)Justent eri ntoaBuy/Sel lposi ti
onf oract ualphy sicaldel iv
eryof
commodi ti
es/shar es/f or ei
gncur r encyi nf ut ureatanexer cisepr icefixedt oday .(i
i)Takeaposi tion
fornetset tl
ementandf i
nal lybuy/sel lcommodi ties/shar es/f orexi nspotmar keti nfutur e.

PROBLEMSONSPECULATI
ON:

P1)Vanit
aFirmsisshor
tinPNBatRs375.Aft
er3monthsVanitaFir
mswant stosquareoffthet
ransact
ion
whenPNBspotquotedatRs400andFut
uresRs397.I
nit
ialMar
ginpaidRs50.Costofcapi
tal10%p.a.?Pass
necessar
yjour
nal
sonthedat
eofset
tl
ementandcomputetheef
fect
ivegai
n/lossin%terms?

Solut
ion:
Profi
t/Loss Dr 22 (397-
375)
ToFi
nanci
alLi
abi
l
ity 22

Fi
nancial
Liabi
l
ity 22
ToCash 22
Ef
fect
ivel
ossinI
NR=MTM loss+Imput
edcostofcapi
tal
=22+10%x50x3/
12=I
NR23.
25
%loss=23.25/50 x12/
3=- 186%p.
a.

P2)Apar tyent
ersint
oforwardcontr
actfort
radi
ngorspecul
ati
on.Contr
actistosel
l$100000dueon30.06@
`47. 50.Today(1stJanuar
y)spot@ is`47.On31stMarch(yearend)t
heforwardcont
ractfor3mont
hs( i
.e.
remainingmaturi
typeri
odupto30.06)tosell$i
savail
abl
e@ ` 47.
55.Rateon30.06is`
47.60.Jour
nal
isethe
entr
ies.

Solut
ion:
Date Spot FR
1.
1 47.00 47.50
31.
3 - 47. 55
30.
6 47.
60 = 47.60
JournalEnt
ri
esint hebooksofSpecul ator:
Dat e Particul
ars Dr
.` Cr
.`
(assumi ngt radedat emet hod)
1.1. FinancialassetA/ C.Dr .
(duefr
om Bk) 47.
50.
000
ToFinanci alli
abil
it
yA/ C. 47.
50.
000
$1,00,000x47. 50
31.3. Profit/lossA/ C.Dr . 5,
000
ToFinanci alli
abil
it
yA/ C. 5,
000
(Forward Cont racti svalued on MTM @47.
55 f
orwar
d@
availabl
ef or3mont hs)
30.6 Profit/lossA/ C.Dr . 5,
000
ToFinanci alli
abil
it
yA/ C. 5,
000
30.6 Financialli
abi l
it
yA/ C.Dr. 47,
60,
000
ToFi nanci alassetA/C.(d 47,
50,
000
(
duef r
om Bank) 10,
000
ToBankA/ C.
(assumi ngset tlementdat emet hod)
31.3. Profit/lossA/ C.Dr . 5,
000
ToFinanci alli
abil
it
yA/ C. 5,
000
(Forward Cont racti svalued on MTM @47.
55 f
orwar
d@
availabl
ef or3mont hs)
30.6 Profit/lossA/ C.Dr . 5,
000
ToFinanci alli
abil
it
yA/ C. 5,
000
30.6 Financialli
abi l
it
yA/ C.Dr. 10,
000
ToBankA/ C. 10,
000

P3)ZemaLi mitedi sshor tinDaburIndi

aFut
ures.Det
ail
sar
easf
oll
ows:
Positi
on: Shor t
Scri
p:DaburI ndiaFut ures
Quantity:10cont r acts
Lot–si ze:100shar es
Brokerage: 1.2%
Ini
ti
alMar gin: 10%
MaintenanceMar gin: 75%ofinit
ialmargi
n
Tradqedat e: 9/1/2017
Settl
ementdat e: 30/ 9/2017
Exerci
sePr ice: ₹544
Spotpr i
ce:₹506
Methodofset tl
ement :NetCash

Pr
icesonv
ari
ousdat
esprov
idedt
oyou:
Dates SpotPr
ice₹ Fut ur
esPr
ice₹ FVofDer
ivat
ive
 9/1/2017 506 544 Ni
l
31/3/2017 541 556 (
12000)
30/6/2017 546 567 (
23000)
30/9/2017 550 552 (
8000)

Passnecessar
yjour
nal
s:

Sol
uti
on:
1)I
nit
ialmargin=₹54400.
2)Maintenancemar gi
n=0. 75x54400=₹40800.I
fthemar
ginaccount
sgoesbel
owMM t
henamar
gincal
li
s
madet otheextentofIni
ti
almargin.
3)Margina/cisaFinancialAsset
.

Jour
nal
s:

9/
1/2017:Deri
vati
vesf
utur
esi
nit
ial
l
yisr
ecognizedatNi
l
Margi
nA/ CDr 54400
ToCash A/ C 54400(10x100x544x10%)
Br
okerageA/CDr 6528
ToCash A/ C 6528

31/
3/2017:Profi
t/l
ossA/CDr 12000
ToMarginA/C 12000(544-
556)x10x100
Pr
ofit/l
ossA/CDr 6528
ToBroker
ageA/C 6528

30/
6/2017:Pr
ofi
t/l
ossA/CDr 11000
ToMar gi
nA/C 11000(556-
567)x10x100
Mar
ginA/C Dr 23000
ToCashA/C 23000(mar
gincal
lmade)

10/
7/2017:MarginA/CDr 15000
ToProf
it/loss A/
C 15000(
567-
552)x10x100
CashA/ C Dr. 69400
ToMarginA/ C 69400

(CAFinalNov2010,Nov2011, May2016)
P4)M/ sTSLtdhasenteredintoacontractbywhichithastheopti
ontosellit
sspeci
fiedassett
oNBLt dfor
`100Lakhsaft
er3y ear
swher easthecurr
entmarketpri
ceis`150Lakhs.Companyalway sset
tl
esaccountby
deli
ver
y.Whatt ypeofoptioni sthi
s?Isi taFi
nancialInst
rument?Explai
nwi t
hreferencetotherelevant
Accounti
ngStandar
d.

Sol
uti
on:
TSLtdhasan“ Opti
ontoSell
”theunder l
yi
ngasset.Hence,iti
saPutOpt i
onContract
.Butasthepastpract
ice
i
stosettl
etheoptionisbydeli
veryhenceitisnotafi
nanciali
nstr
ument.Buti
fthepastpract
icei
stosettl
eon
netcashbasi
st henitisaFI.Put/Cal lopti
onisaderivati
veinst
rumentbutmayormaynotbeaFi nancial
I
nstr
uments.Deli
verybasedderi
vati
vecontract
sarenotFI.

P5)On1stFebr uary2009,Futur
eLtdenteredi
ntoacontr
actwi
thSonLtd,t
orecei
vetheFairValueof1000
Futur
eLtd.’
sOwnEqui tySharesOutst
andingason31-01-
2010i
nexchangef
orpaymentof`1,
04,000incash,
i
.e.`104perShare.Thecontr
actwil
lbesettl
edi
nnetcashon31-
01-
2010.
TheFai rValuesofthi
sforwardcont ractonthedi
ffer
entdat
eswere:
FairValueoff or
wardon01- 02-2009Ni l
FairValueoff or
wardon31- 12-2009` 6,
300,
FairValueoff or
wardon31- 01-2010`2,000
Presumi ngthatFutur
eLt d,
closesi t
sbookson31stDecembereachy ear
,passent
ri
es–I fnetsett
ledi
ncash
andI fnetissettl
edbySonLt d,bydel i
veri
ngSharesofFut
ureLt
d.Whatwil
lbeyouranswerifthesett
lement
wil
l beforfi
xequi t
ysharesataf ixedexerci
sepri
ce.
(CAFi nalNov2010Mar ks8)

Sol
uti
on:

1. Jour
nalEnt
ri
es(CashSet
tl
ement)
01.
02.
2009FairVal
ueofaDeri
vat
ivecont
racti
sNi
loni
nit
ial
recogni
ti
ondat
e.

31.12.2009Yearend
Forwar dContr
actA/ cDr.6,
300
ToProf
itandLossA/c6,300
(BeingIncr
easeinFairVal
ueofForwardCont
ract
)

31.1.2010.
ProfitandLossA/ cDr.4,
300
ToFor wardContr
actA/ c4,300
(BeingDecr easeinv al
ueofForwardContractr
ecor
ded)
31.1.2010Set t
lementofNetReceivablebyCash
BankA/ cDr.2,000
ToFor wardContractA/c 2,000
(BeingSet t
lementofFor wardContr
actbyCash)

2. JournalEntri
es(Settlementof“ net
”amountbyshar es)
Fir
stthreejournalentri
esaret hesameasabov eforCashSet t
lement
.Thefinal
entrywil
lbeasf
oll
ows—
31.1.
2010: Settl
ement-bydel iv
eryofShar esofFutureLtd.
Equit
yShar esofFut ureLtd(OwnShar es)A/cDr.2,
000
ToFor wardCont ractA/c 2,000
(Sett
lementofFor war dContractbyreceiptofSharesofSonLt downequit
yshares)
Noofshar es=18. 87=2000/106=( 104000+2000)/1000=106 t oday
smar ketpr
ice.

3. JournalEntr
ies(Set
tl
ementofGrossdeli
ver
yofshar
es)
Entr
yonlyonsettl
ementdatewil
lbeappl
icabl
e:
Equi
tySharesA/CDr 104000 (1000x104) equi
tyt
ransact
ion
ToCash 104000

P6)XLt
dhaspr
omisedtobuyI
TCshares@1033aft
er3mont
hs.Thef
inalMPonset
tl
ementi
sRs1076.Pass
ent
ri
esf
orGr
ossDel
iver
yandNetcashset
tl
ement
.

Sol
uti
on:
I
nit
ial
recogni
ti
on: -
--
-Noent
ryasder
ivat
iveshav
eNi
lval
ue-
--
--

Set
tl
ement
:IfGrossdel
iver
y:
Equit
yshares1076
ToCash 1033
ToP/L 43

Set
tl
ement
:Netcash(
specul
ati
on)
CashDr 43 ( 1076-
1033)
ToP/L 43

P7)Inter
estrateswap:
CompanyAhasout standingdebtonwhi chi
tcurrent
lypaysfixedr ateofi nter
estat9.5%.
Thecompanyi ntendst or efi
nancet hedebtwithaf loat
ingratei nterest.Thebestfloatingrat
eitcanobtai
nis
LIBOR+2%.Howev eritdoesnotwantt opaymor ethanLIBOR.
AnotherCompanyBi sl ookingforal oanataf i
xedr ateofinterestt ofinanceitsexports.Thebestratei
tcan
obtai
n13. 5%,buti tcannotaf fordtopaymor ethan12%.Howev er,onebankhasagr eedtoofferfi
nanceata
fl
oati
ngr ateofLI BOR+2%.Ci tiBankisi nt
hepr ocessofar rangingani nter
estrat
eswapbet weenthesetwo
companies.AssumeLi bor10%.
(a) Wi t
haschemat icdi agram, showhowt heswapdeal canbest ructured.
(b) Whatar et heinter estsav i
ngsbyeachcompany ?
(c) Howmuchwoul dCi tiBankr ecei
ve?

Sol
uti
on:

Aforesai
dquesti
oncanbest r
uctur
edasfol
lows:
CostofDebt
Company Tar
get Fi
xedRat e Fl
oat
ingRat
e
A Fl
oati
ng 9.
50%p. a. LI
BOR+2%
B Fi
xed 13.50%p.a. LI
BOR+2%
Dif
ference 4% 0%
(a) Schematicdiagr
am foraboveswapdealwil
lbefoll
ows:
 Funct
ioni
ngOFswapdeal -Stepwise:
Step1:CompanyApay s9.5%perannum ( f
ixedr ate)tolenders.
Step2:CompanyBpay sLIBOR+2%( fl
oati
ngr ate)tolenders.
Step3:CompanyAr ecei
vesinter
estfr
om bank@ 9. 5%perannum ascompensat i
onFORf
ixedr
ateloan.
Step4:CompanyApay sLIBORt obank(asitist hetarget).
Step5:Ci
tiBanktr
ansfer
sLIBORt ocompanyBt opayl enders.
Step6:Atlast
,CompanyBpay s10%( bal
anci ngfigure)tobank.Hence,costt
oCompanyBwi llbe:10%
(t
oBank)+2%( tolender
s,extr
a)=12%.

P8)Thest
ruct
ureOFswapdeal
canbesummar
isedasf
oll
ows:
Company Tar
getSav
ings NetCostPai
d t
oReceived Pai
d to
Market fr
om Bank Bank
A (
LIBOR+2%)-(
LIBOR)=2% BOR 9.
LI 5% 9.
5% LI
BOR
B 13.
5%-12%=1.
5% 12% LI
BOR+2% LIBOR 10%(B.
F.)
(
a) I nterestsav i
ngbyeachcompany:
Asdi scussedabov e,ifcompanyAt akesf ixedratedebtandcompanyBt akesfl
oat
ingr atedebt
,then
therei stotalsavi
ngsof4%( 13.5%-9.5%)canbemade.
Since,CompanyAcannotaf fordmoret hanLI BORso,i t
stargetsavi
ngswouldbe2%[ (LIBOR+2%)–
LIBOR] .So, i
tneeds2%shar eoutoftotal4%sav i
ngs.
Fur t
her ,CompanyBcannotaf fordmorethan12%so, i
tstar
getsavi
ngswouldbe1.5%[13.5%-12%].So,
i
tneeds1. 5%shareoutoft otal4%savings.Therefore,t
hebalanceis0.5%[
4%-2%-1. 5%]whi chwi
llbe
char gedbyCi tiBank.
(a)Aspert heabov eanalysi
s,Ci
tiBankwouldr eceiv
e0. 5%.

Solut
ion:
BOOKSOFALTD
JournalEnt
ri
es
S.No. Par t
iculars Dr.` Cr
.`
(1) 9.5%Fi xedAdv anceA/ c Dr 100
ToCi tiBankA/ c 100
(beingf i
xedr at
eadv ancegrantedtoCitiBank)
(2) CitibankA/ c Dr 100
ToLI BORLoanA/ c 100
(Beingf loat
ingloanreceiv
edf r
om Ci t
ibank)
(3) I
nt erestA/ c DR 9.
5
ToOut si
delenderA/c 9.
5
(Beingint er
estpai dtooutsi
del ender
.)

(
4) Citi
BankA/ c Dr 9.
5
ToInterestA/c 9.
5
(bei
ngi nterestonadv ancegivent
oCitiBank)
(
5) I
nter estA/c Dr 10
ToCitibankA/ c 10
(bei
ngi nterestonl oanobtai
nedfr
om Citiban.
)
(
6) P&LA/ c Dr
ToInterestA/c 10 10
(bei
ngi nterestexpendituretr
ansf
err
edt oP&LA/ c.)
(
7) Citi
BankA/ c Dr
ToBankA/ c 0.
5 0.
5
(Beingamountpai dt oCit
iBankoninter
estdiff
erence
betweenl oanandadv ance.)

P9)XLt dhaspr
omi
sedt
osel
lGBP@97af
ter4mont
hs.Lotsi
ze100uni
ts.Noofcont
ract
s6.Mar
gins9.
5%.
Broker
age1%.

Date SpotRat
e Fut
ures
1/1/2017 1GBP=Rs99.
99 97.0
31/3/20171GBP=Rs102.
36 99.5
30/4/20171GBP=Rs103.
00 same(becausecont
racti
smat
ured)
Soluti
on:
1/1/2017:I
gnorespotrat
es.
MarginA/C 5529 (
100x6x97)0.
095
ToCash 5529
(
ini
ti
al mar
ginspai
d)

BrokerageExpA/ C 582 (
100x6x97)x0.01
ToCash 582
I
nit
ial
l
ynoentr
yf order
ivat
iveasnogai
n/lossonfir
stday.

31/
3/2017:
Profit/l
ossA/CDr 1500 ( 99.
5-97)
100x6
ToFinanci
alLi
abi
l
ity 1500
(
mar ktomarketonB/Sdat
e)

Profi
t/lossA/CDrA/ C 582
ToBrokerageExp 582
(
trfofbr
okerageexptoP/
L)

30/
4/2017:
Profit/l
ossA/CDr 2100 (103-
99.
5)100x6
ToFinanci
alLi
abi
li
ty 2100
(
mar ktomarketonset
tl
ementdat
e)

FinancialLi
abi
li
tyA/
CDr3600
ToMar gi
n/Cash 3600
(
fi
nal sett
lement
)

P10)XLt
disshor
tinNi
ft
yIndexFut
ures.

Date SpotNift
yIndex Nift
yFutur
es
1/1/2017 8900 8925( XLtdent
erst
hederi
vat
iveposit
ion)
31/3/2017 9200 9341
30/4/2017 9355 9425
Lotsize:50;NoofCont ract
s:20.Margins=12%.Maint
enancemar gi
ns75%ofi
nit
ialmar
gins.Br
oker
age:
1.
2%.

Answert
hefol
lowi
ngquesti
ons:
1)Cal
cul
atet
hegrossposit
ioninNi
ft
yFut ures?
2)Computet
heDeri
vati
vevalueon1/1/2017and31/ 3/2017?
3)Computet
heopenpositi
onon31/3/2017?
4)Cal
cul
atet
hetopupofmar ginmoneyon31/ 3/
2017?
5)I
fXLtdexi
ton30/4/2017computethet otal
loss/gaininRs.
?Ignor
eint
erestcost
.

Soluti
on:
1)Shor tposi
ti
oni nNi f
tyI
ndex=Rs89,25,
000( 8925*50*20)
2)ValueofDer ivativ
eon1/ 1=Ni
l,
on31/ 3=- 4,
16,
000( +8925-9341)
*50*
20.
3)Openshor tposi ti
onon31/3=93,41,
000( 9341*50*20)
4)Init
ialMargins=12%of8925000=Rs.1071000, Mai nt
enanceMargins=1071000x75%=Rs.8,03,
250,
BalanceofMar ginon31/3=1071000–l ossonMTM =1071000–416000=6, 55,000,Topup=1071000–
655000=Rs.4, 16,000

5)LossonMTM ( 1/
1–30/ 4)=(
9425-8925)
*50*20=Rs.5,
00,
000
Br
okerage8925000x1.2% =Rs.1,
07,
100
I
nter
estblockedi
nmargins(i
gnor
e) -
Tot
alloss= Rs.607100
Pr
obl
emsonOpt
ions:

Let
sdi
vi
det
hepr
obl
emsi
nto(
i)Onl
yMPi
sgi
ven,
(ii
)Opt
ionpr
emi
um i
sgi
ven,
(ii
i
)Bot
hgi
ven.

P10)XLt dhaspurchasedt
hecallopt
[email protected]
lementdat
etheactualpr
icewasRs
2066.Callpremium pai
dtobuyt hecontr
actRs.46.PassJour
nalsassumingGrossdel
iv
eryandNetcash
set
t l
ement.
Whatwi l
lbeyouransweronset
tl
ementdateifMPis@2030.
Soluti
ons:

I
nit
ialr
ecogni
ti
on:
Opti
onpremium Dr46(r
ememberpr
emi
um pai
disnotexpensebutanAsset
)
ToCash 46

Sett
lement
:IfGrossdel
i
very:
Equi
tyshar
esDr 2066( Fai
rValue)
Lossonfai
rv al
ue 20 (
balanci
ngf
igur
e)
ToOpt i
onpremi
um 46
ToCash 2040

Sett
lement:Netcash(specul
ati
on)
CashDr 26 (2066-2040)
Lossonf ai
rvalueDr 20 (
balanci
ngf
igur
e)
ToOptionpremium 46

I
fMPi s2030theopt
ionwil
llapse.InGr
ossdel
iver
ycaseshar
eswi
llbepurchasedfrom t
hemar ket
.InNet
Cashnot
hingwi
ll
berecdorpaid.Buti
nbotht
hecasesOpt
ionPr
emi
um wil
lbereversedorw-of
ftoP/L.

P11)XLtdhaspur chasedtheputopt
ionofWI
PROshar
esatapr
emi
um ofRs.46.
Premium onv
ariousday s:
1/1/2017 =46
2/1/2017 =48
3/1/2017 =50
4/1/2017 =49
5/1/2017 =55

PassJour
nal
s.

Sol
uti
ons:

I
niti
alrecogni
tion:
Opti
onpr emium Dr46
ToCash 46
2/1:Optionpremium Dr2
ToP/ L 2
3/1:Optionpremium Dr2
ToP/ L 2
4/1:P/LDr 1
ToOpt i
onpremium Dr2

5/
1:Opt
ionpremi
um Dr6
ToP/L 6
P12)Tarunpurchasedacallopti
onf
rom Var
unatapremium ofRs22.Thespotpri
cei
sRs322.Theexerci
se
pri
cesetatRs325.Onv al
uati
ondat
eMPquot edatRs336.Thepremium t
radedatRs26.Ont
hesett
lement
thepr
emi um wasquotedatRs20andtheMPwasRs345.

Sol
uti
ons:

I
nit
ialr
ecogni
ti
on:
Opti
onpremium Dr22
ToCash 22

Valuati
on:
Optionpremi
um Dr4(
26-
22)
ToP/L 4
(opti
onpremi
um MTM)

Sett
lement:
CashDr 20
P/L Dr 6
ToOptionpr
emi
um 26(
22+4)

P13)Abhayfur
nishest
hefoll
owingi
nformat
ionaboutal
l“Opti
ons”att
heBalanceSheetdat
eason31.
03.
2016.
Deter
minetheTotalAmountofProv
isi
onstobemadei nhisbooksofaccount
.

Secur
iti
es A B C A B C
Detai
l
sofOpt
ionsBought Det
ail
sofOpt
ionsSol
d

Pr
emi
um pai
d 35,
000 15,
000 20,
000 Pr
emi
um r
ecd. 20,
000 30,
000 20,
000
Premium pr
evai
l
ingonB/
S 30,
000 5,
000 8,
000 Premium pr
evai
l
ingonB/
S 25,
000 20,
000 15,
000
date date

(
CAFi
nal
May2016)

Sol
uti
on:
Summari
sedentr
yforopt
ionpremium i
sasfoll
ows:
Rememberpai
disanassetforhol
derandrecei
vedi
sal i
abil
i
tyf
orwr
it
er.
Asanopti
onhol
der:
Opti
onA=35000-30000= 5000loss(r
educti
onofasset)
Opti
onB=15000-5000= 10000loss(r
educti
onofasset
)
Opti
onC=20000-8000=12000l oss(r
educti
onofasset)
27000loss

Asanopti
onwrit
er:
Opti
onA=20000-25000= 5000loss(i
ncreaseinli
abil
it
y)
Opti
onB=30000-20000=-10000gai
n(reductionofl
iabi
li
ty)
Opti
onC=20000-15000=-5000gain(r
educt i
onofli
abil
it
y)s
-
10000gain
Netl
ossprov
isi
on=27000–10000=Rs.17, 000.
PROBLEMSONHEDGI
NG:

FAI
RVALUEHEDGE:
Fai
rVal
ueHedgecompensat
es/el
i
minat
est
her
iskar
iseoutoft
heFai
rVal
ueofanassetorl
i
abi
l
ity
.

P14)Aakshay aLtd.hasgi vena12. 50%f ixedr ateloantoitssubsi diar

yShay aLt d.Aakshay aLt d.measur es
thi
sl oanatanamor ti
sedcostof` 2,
50,000.Aakshay aLtd.hasplantst ohiveof fthereceivableatal aterstage
andasameasur etosafeguardagai nstf alli
nv alueofitsdueenter sintoapay -fi
xed,receivedfloatingint
erest
rateswapt oconvertthefi
xedinterestr eceiptsintof l
oati
ngrater eceipt
s,Aakshay aLt d.designatest heswap
asahedgi nginstr
umenti naf ai
rv aluehedgeoft heloanasset.Ov erthefollowingmont hs,mar ketint
erest
ratesi ncr
easeandAakshay aLtd.earni nterestincomeof
`25,000ont heloanand` 1,000asneti nterestpay mentsont heswap.Thef ai
rv alueoft heLoanAsset
decr easesby`5, 000whi l
et hatoft hei nterestr at
eswapi ncreasesby` 5,000.Youar ei nf
ormedt hatall
condi ti
onsrequir
edf ortheHedgeAccount i
ngar esat i
sfi
ed.Youar er equir
edt opassj ournalent r
ies,with
suitable nar r
ati
ons, i n t he books of Aakshay a Lt d. t o r ecord t he abov e t ransacti
ons.
(CAFi nalMay2010OS)

Solut
ion:
S.No. Part
icul
ars Dr.` Cr
.`
(1) CashA/ c Dr 25,000
ToInterestA/ c 25,
000
(Bei
nginterestrecdonl oanasset)
(
2) Deri
vati
veA/ c Dr 5,
000
ToHedgi nggai nA/ c….(P/L) 5,
000
(Bei
ngincreasei ninterestrat
eswap)
(
3) HedginglossA/ c DR ….(P/L) 5,
000
ToLoant oShay aA/ c 5,
000
(Bei
ngdecr easeinf airvalueofloan)
(
4) CashA/ c Dr 1,
000
ToInterestA/ c 1,
000
(Bei
nginterestsettl
ementoni ncreaseinswap)

P15)Samt aLtdhasinvestmentsinequit
yshar esofJal
paLtd@3,00,000classi
fi
edasFVOCI.
SLt dexpectsadecli
nei nthev al
ueofinvestmentsandhenceent erint
oaputopt i
ontosel
ltheshar
esfor`
3,00,
000.Ift
hef ai
rval
ueoft heshar esf
all
st o`2,85,
000andv al
ueofopt i
ontobe`15,000assumi
ngper
fect
hedge,accounttheabovetransacti
onsconsideri
nghedgingandstatewhetheri
tisFVHorCFH.Whatwoul
dbe
youranswerifhedgeaccountingisnotadoptedbySLt d?

Sol
uti
on:
I
tisaFVHasputopt
ioni
sent
eredt
opr
otectf
rom t
hev
alueofi
nvest
ment
s(asset
)

Accounti
ngifhedgea/cisadopt
ed:
Equi
tyDr 15, 000(AsperIndAS109changesinFVTOCIist
ransfer
redtoEqui
ty)
ToInvest
ment sinJLtd 15,
000
Deri
vati
veassetDr 15,000
ToEqui t
y 15,
000
Thederi
vati
veinstr
umentmeantforhedgi
ngwil
lalsobet
ransf
erredtoEqui
ty.
Accounti
ngifhedgea/
cisnotadopted:
Equi
tyDr 15, 000
ToInvestmentsi
nJLtd 15,
000
Deri
vati
veassetDr 15,
000
ToP/ L 15,000
AstheDeriv
ativ
eisnotmeantforhedgi
ngi
tiscomput
edonst
andal
onebasi
sFVTPL.

P16)KananLt dhasal ongposit

ioninAsianPai ntsfor2,
70,000equit
yshar esofRs120.Equi tyshar
es
designatedasFVTOCI .Tohedget hespotposit
ionKananLt dwant stotakeappr opri
ateposi
ti
oninNift
y
Futures.BetaofAsianPaintsi
s1.
50wi t
hNift
y.Lotsize=200units.Ot
herdetai
l
sar egivenbel
ow:
Asi
anPaint
s Nift
ySpot Nift
yfut
ures
1/2/2016 120 8000 8100
31/3/2016 115 7954 7850
31/3/2017 103 7421 7321

Answert
hefoll
owing:
Natur
eofhedge?,
Hedgingi
tem?,Hedgi
nginst
rument
?,Posit
ioni
nNi
ft
y?,
Passj
our
nal
sforhedgi
ng?
Whatwil
lbeyouransweri
fnohedgeaccounti
ngispr
efer
red.

Sol
uti
on:
Fai
rValuehedge:Nift
yistakenforprot
ect
ingspotposi
ti
onofAsi
anPai
nts.
Hedgeitem:SharesofAsianPaint
s
Hedgi
ngi nst
rument:Nif
tyfut
ures.
Posi
ti
oni nNift
y:Forpr
otecti
ngthelongposi
ti
oninspotwehavetot
akeashor
tposi
ti
oni
nNi
ft
y.

Calcul
ati
onofNumberofcont
ract
s=
LHS=RHS
NumberofsharesxMPxBet a=Noofcont
ract
sinNi
ft
yxl
otsi
zexNi
ft
yfut
ure
270000x120x1. 50=Nosx200x8100
Noofcont r
act
s=30short.

Asiti
saFVH onequi t
yinst
rumentdesi
gnat
edasFVTOCIt
hegai
n/l
ossonr
e-est
imat
ionofhedgi
ng
i
nst
rumenti
str
ansf
err
edtoOCI/Equi
ty.

1/
2/2016:
---t
hedat
ewhenNi
ft
yissol
dnoent
ry-
--

31/
3/2016:OCI Dr 1350000 (120-
115)*270000
ToInvest
mentsinshares1350000
Ni
ft
yFuturesAssetDr1500000 (8100-7850)*
30*200
ToOCI 1500000

31/
3/2017:OCI Dr 3240000
ToInvest
mentsinshares3240000
Ni
ft
yFuturesAssetDr3174000
ToOCI 3174000

I
fHedgingisnotadopted:
I
nvest
ment swil
lberecordedasperFVTOCI(
asment
ioned)
Ni
ftyf
utureswil
lbeFVTPL
1/
2/2016:
---

31/
3/2016:OCI Dr 1350000
ToInvest
mentsinshares1350000
Ni
ft
yFuturesAssetDr1500000
ToP/ L 1500000

31/
3/2017:OCI Dr 3240000
ToInvest
mentsinshares3240000
Ni
ft
yFuturesAssetDr3174000
To P/ L 3174000

P17)JonesCompanyi ssues$1,000,
000of5-
year8%f
ixed-
rat
ebondsonJanuar
y2,
2016.Theent
ry
torecor
dthistr
ansact i
oni sasfoll
ows:
January2,2016
Cash Dr1,000,000
ToBondsPay able1,000,
000

Afixedi nter
estr atewasof feredt oappealtoinv estors,butJonesi sconcer nedthati
fmar ketinterest
rat
esdecl ine,thef ai
rvalueoft hel i
abil
it
ywi l
lincreaseandt hecompanywi llsuff
eraneconomi closs.
Topr otectagai nstther i
skofl oss,Jonesdeci dest ohedget her i
skofadecl i
neinint
erestr atesby
enteri
ngi ntoa5- yearinterestr ateswapcont r
act.Thet er msoft heswapcont r
acttoJonesar e:
AJoneswi l
lreceivefi
xedpay ment sat8%( basedont he$1,000,000amount ).
BJoneswi l
lpayv ari
abler ates,basedont hemar ketratei neffectthroughoutthelif
eoft heswap
contract.Thev ariabl
er ateatt heinceptionoft hecont r
acti s6.8%.Wi ththi
sswapJonescanchange
theinterestont hebondspay abl efrom afi
xedr atetoav ari
ablerate.

Oneachi nterestpayment( settl

ementdat e) ,Jonesandt hecounter partywillcomput et hedi ff
erence
betweencur r
entmar keti nterestratesandt hef i
xedr ateof8%anddet erminet hev al
ueoft heswap.
Asar esul t
,ifinter
estr atesdecl i
ne,thev alueoft heswapcont ractt oJonesi ncreases( Joneshasa
gai
n),whi leatt hesamet i
meJones’ sfi
xed- r
atedebtobl i
gati
onincr eases( Joneshasaneconomi c
l
oss).Theswapi sanef fectiveriskmanagementt oolint hi
ssetti
ngbecausei t
sv al
uei sr elat
edt othe
sameunder lying(i
nterestrates)t hatwil
laf fectt hev alueoft hefixed-ratebondpay able.Thus,i fthe
val
ueoft heswapgoesup, itof f
setsthelossr el
at edtot hedebtobl i
gation.Thi seconomi clossar i
ses
becauseJonesi slockedi ntot he8%i nterestpay mentsev enifratesdecl i
ne.Theunder l
y i
ngforan
i
nterestrateswapi ssomei ndexofmar keti nter estrates.Themostcommonl yusedi ndexi sthe
LondonI nterbankOf ferRate, orLIBOR.Int hisexampl e,weassumedt heLI BORi s6.8%.
Assumi ngt hattheswapwasent er
edintoonJanuar y2,2001( thesamedat east hei ssuanceoft he
debt),t
heswapatt hi
st imehasnov al
ue;ther eforenoent ryisnecessary :

January2, 2016
Noent ryrequir
ed—Memorandum t
onotethatt
heswapcontracti
ssigned.Attheendof2016,t
he
i
nterestpay mentont
hebondsismade.Thej
our
nal
entr
ytorecordt
histr
ansact
ionisasf
oll
ows:

December31, 2016
I
nterestExpense Dr80,000
ToCash( 8%x$1,
000,
000)80,
000
Attheendof2016,mar keti nt
erestrateshavedecl
inedsubst ant
iall
yandt hereforethev al
ueoft he
swapcont racthasi ncr
eased.Jonesi storecei
veafixedrateof8%or$80, 000( $1,
000,000x8%)and
payav ari
abler ate(whichint hi
scasei s6.8%)or$68,000.Jonesthereforereceives$12,000($80,000
-$68,000)asaset t
lementpay mentont heswapcontractonthef i
rsti
nterestpay mentdate.Theent r
y
torecordthistransacti
onisasf oll
ows:
December31, 2016
Cash Dr 12, 000
ToI nterestExpense12, 000
Inadditi
on,amar ketappr aisalindi
catesthatthev alueoft hei nt
erestrateswaphasi ncreased
$40,000.Thisincreaseinv alueisrecordedasfoll
ows:

December31, 2016
SwapCont ractDr40, 000 ( Fi
nancialAsset)
ToP/ L 40,
000
Thisswapcont racti
sreportedinthebal ancesheet
,andthegai
nont hehedgi
ngt
ransact
ionis
repor
tedint heincomestatement.Becauseinter
estr
ateshav
edecl
i
ned,t
hecompanyr
ecordsaloss
andar el
atedincreasei
nitsli
abi
li
tyasfoll
ows:

December31,2016
P/L Dr40, 000
ToBondsPayabl
e40,
000

BalanceSheet
Presentat
ionofFai
rValueHedge
JonesCompany: BALANCESHEET( Extr
act)December31,2016
Li
abili
ti
es Curr
entasset
s
Bondspay abl
e $1,040,
000 Swapcontract $40, 000

Theef f
ectontheJonesCompanybalancesheeti
sTheBondPay abl
efairval
ueremai
nsconstant
.
Theoreti
cal
ly
,thi
sf airval
uechanger
efl
ect
st hepresentv
alueofexpectedfut
uredi
ffer
encesin
var
iableandfi
xedinter
estr
ates.

#Not esonValuat
ion:
Val
uat i
onofSwap=Val uati
onoffi
xedDebt–Val uati
onoffl
oat
ingDebt
V(f
ixeddebt)=PVofCoupons+PVofRedempt ionatthenewYTM =80,
000Cumul
ati
vePVF(
6.8%,
4)
+10,00,000PVF(6.8%,
4)=80000x3.403+1000000x0.
7686=10,40,
000
V(f
loatingbond)=FaceValuealways=10,00,
000
Swapv alue=1040000-1000000=40,000Asset

On t hei ncomest atementsi de,i nt

erestexpenseof$68, 000 isr epor
t ed.Joneshasef fect
ivel
y
changedt hedebt ’
sint er
estr at
ef rom fixedtov ar
iable.Thatis,byreceivi
ngaf i
xedrateandpay i
nga
vari
abl erateont heswap, thef i
xedr at
eont hebondpay abl
eisconv ert
edt ovariabl
e,whichr esul
tsin
anef fectiveint
erestr ateof6. 8%i n2016.Al so,thegai nont heswapof fsetsthelossrelatedt othe
debtobl i
gat i
on,andt hereforethenetgai norlossont hehedgingact i
vit
yiszer o.
Theov er
allimpactoft heswapt r
ansactionont hef i
nancialst
atement sisshowni nI
ll
ustr
ation
IncomeSt atement :Present ati
onofFai rValueHedge:Fort hey earDec2016.
Increasei nlossandi ncreasei nbondspay able$40, 000
Increasei ngainandi ncreasei nswapasset $40, 000
NetEf fect= 0
I
nter
estExpense(
$80,
000-$12,
000) $68,
000

Insummar y,theaccount ingforfai

rv aluehedges(asi l
l
ustratedi
nt heJonesexampl e)recordst he
deri
vati
veati tsfairvaluei nthebalancesheetwithanygai nsandl ossesr ecordedi ni ncome.Thus,
thegainont heswapof fsetsorhedgest helossont hebondpay ableduet othedecl ineini nter
est
rat
es.Byadj usti
ngt hehedgedi tem (t
hebondpay ableintheJonescase)t of airvalue,withthegai nor
l
ossr ecordedi nearnings,theaccountingfortheJonesbondpay abledeviatesf rom amor t
izedcost.
Thisspecialaccount i
ngi sjusti
fi
edinordertoreportaccurat
elythenatureoft hehedgi ngr elati
onship
betweent heswapandt hebondpay ableinthebalancesheet( bot
ht heswapandt hedebtobl igat
ion
arerecordedatf ai
rv alue)andt hei
ncomest atement( of
fset
tinggainsandl ossesar ereportedi nthe
sameper iod).

P18)OnApr i
l1,2017,OmegaLt d.borrowed`10l akhatannualf i
xedinterestrateof7%pay ablehalf-
yearl
y.
Thelifeoft heloani s4y earswithnopr e-paymentper mitt
ed.Thecompanyexpect edtheinterestr
atetofall
andont hesameday ,i
tenteredintoani nter
estrat eswapar rangement,wher ebythecompanywoul dpay6-
mont hLIBORandwoul dreceiveannualfi
xedinterestof7%ev eryhal
f-y
ear.Theswapef fect
ivelyconvert
edthe
company ’
sfixedrateobli
gationtofloat
ingrateobligati
on.Thef oll
owingvalueofswapanddebtar eavail
able
Valueofswap( `inlakh) Val ueofdebt( `i
nlakh)
Apri
l1, 2017 +0.2 10.2
March31, 2018 –0. 1 9.9
Six-
mont hLI BORonApr i
l1,2017was6%andt hatonOct ober1, 2017was8%.
Showi mpor tantaccounti
ngent ri
esinrespectoftheswapar r
angement .

Sol
uti
on:Thei
nter
estr
ateswapi
susedt
ohedgef
airv
alueoff
ixed-
rat
edebt
.Thi
sisacaseoff
airv
aluehedge.

I
nthebooksofOmegaLt
d.(
Jour
nal
Ent
ri
es)
Par
ti
cul
ars

Fi
rsthalfyear:
I
nterest Dr 35,000 (1000000x7%x½)
Cash 35,
000
P/L Dr 20,000 (given)
Loan 20,
000
SwapAsset Dr 20,000
ToP/ L 20,
000
Cash Dr 5,0001000000*(7-6)
%x1/
2
ToI nt
erest 5,
000

Secondhalfyear:
Int
erest Dr 35,
000 (1000000x7%x½)
Cash 35,
000
Loan Dr 30,
000 (gi
ven)
P/L 30,
000
P/L Dr 20,
000
ToSwapAsset 20,000
Cash Dr 5,
0001000000*(8-7)
%x1/
2
ToInterest 5,
000

PROBLEMSONCASHFLOW HEDGE:

Cashf
lowhedgesar
eusedt
ohedgeexposur
est
ocashf
lowr
isk,
whi
chi
sexposur
eto
thevari
abi
li
tyincashf l
ows.Specialaccounti
ngisall
owedforcashfl
owhedges.FVHgains
andlossesarereporteddir
ectl
yinnetincome.Howev er,
deri
vat
ivesusedi
ncashflowhedges
areaccount
edf oratfairv
alueont hebalancesheet
,butgai
nsorlossesar
erecordedi
n
equit
yaspar tofothercomprehensiveincome.

P19)I nSeptember2016, Al
l
iedCanCo.ant i
cipat
espur chasing1,
000met ri
ct onsofaluminum inJanuary2017.
All
iedi sconcernedt hatpr
icesforaluminum wi l
lincreaseinthenextf ew mont hs.Tocont r
olit
scostsin
producingcans, Al
li
edwantst oprot
ectagainstpossibl
epr i
ceincreasesforaluminum i
nv ent
ory.Tohedgethe
ri
skthatitmi ghthavetopayhigherpri
cesforinvent
oryi nJanuar
y2017, All
i
edent ersi
ntoanal uminum f
utur
es
contract(Buypositi
on).

Af utur escont ractgivesthehol derther ighttopur chaseanassetatapr esetpriceforaspeci f

iedperiodof
ti
me.I nt hi
scase,t heal uminum f uturescont ractgivesAlli
edt her i
ghttopur chase1, 000met ri
ctonsof
alumi num for$1, 550pert on.Thispr i
cei sgoodunt ilt
hecontractexpir
esinJanuar y2017.Theunder lyi
ngfor
thisder iv
ati
v ei sthepr i
ceofalumi num.I fthepriceofaluminum r i
sesabov e$1,550,thev al
ueoft hefutur
es
contractt oAlliedincreases,becauseAl liedwi l
lbeabl etopurchasethealumi num atthelowerpriceof$1,550
perton.
Assumi ngthatt hefuturescontractwasent eredintoonSept ember1, 2016,andthatthepr icet
obepai dtoday
forinv entor
yt obedel iver
edinJanuar y —thespotpr ice—wasequalt otheopt i
onpr i
ce,thefutur
escontracthas
nov alue.Ther eforenoent ryi
snecessar y:
Sept ember ,2016

Noent
ryr
equi
red.Memor
andum ent
ryi
spassedt
oindi
cat
ethatt
hef
utur
escont
racti
ssi
gned.

AtDecember31,2016,t
hepricef
orJanuar
ydeli
veryofaluminum hasi
ncreasedto$1,
575permet
ri
cton.
Al
li
edwouldmakethefol
lowi
ngent
ryt
orecordt
heincreasei
ntheval
ueofthefutur
escont
ract
:

December31,2016
Fut
uresCont
ract Dr25, 000
ToHedgingReser
ve 25,
000 (
[$1,
575-$1,
550]31,
000t
ons)

Thef ut ur
escontractisr epor
tedinthebalancesheetasacur rentasset.Thegai nonthefuturescontractis
reportedaspar tofot hercompr ehensi
veincome.SinceAlli
edhasnoty etpur chasedandsoldt heinventory
,
thi
si sanant ici
patedt ransacti
on,andgainsorlossesont hefutur
escont ractareaccumulatedinequi t
yas
partofot hercompr ehensiveincomeuntilt
heperi
odi nwhichtheinvent
oryissol dandear
ningsi saf
fected.In
Januar y2017,Alliedpur chases1,000met ri
ctonsofal uminum for$1,600i ncash/spotandmakest he
foll
owi ngentr
y:

January,2017
Aluminum Inv
entory Dr1,
600,000
ToCash 1,
600,000(1000x1600)
Atthesamet ime,All
i
edmakesfinalset
tl
ementonthef
utur
escont
ractandmakest
hef
oll
owi
ngent
ry:

January,2017
Futur
esCont r
act Dr25, 000
ToHedgingReserve 25, 000 ( [$1,
600–1, 575]x1,
000tons)
Cash Dr50, 000
ToFuturesContr
act50, 000(25,
000+25, 000)
Throughuseoft hefut
urescontractder
ivati
ve,All
iedhasbeenabl
etofixt
hecostofi
tsi
nvent
ory
.

#Inpr
acti
ce,
futur
escont
ract
sar
eset
tl
edonadai
l
ybasi
s;f
orourpur
posesweshowonl
yoneset
tl
ementf
or
t
heent
ireamount.

Ef
fectofHedgeonCashFl
ows:
Therearenoincomeeffect
satt
hispoi
nt.Thegai
nonthefut
urescont
racti
saccumul
atedinequi
tyaspartof
othercompr
ehensiv
eincomeunti
ltheperi
odwhenthei
nvent
oryissol
dandearni
ngsi
saf f
ect
edthroughcost
ofgoodssold.

RevenueSt at
ementfortheyear…………………….
.
SalesandSer vci
es 22,00,000 (assume)
Less:Costofgoods 16,00,
000
(-
)HedgingReserve ( 50,
000) (15,50,000)
Less:Processi
ngcost (2,50,
000)( assume)
Profi
t 4,00,000

Canuobser
vet
hei
nvent
orycosti
s1550000whi
chwast
hepr
icedeci
dedi
nit
ial
l
yinhedgi
ng.

P20)Att hebegi nni ngof2016,Ber ryLtd.issuesa10- yearliabi l

itywithapr i
ncipalamountof$100, 000f or
$100, 000( i
.e. ,atpar ).Thebondpay sfl
oatingi nt erestt hatreset seachy earasmar keti nter
estr ateschange.
EntityA measur est hel i
abilit
yatamor t
izedcost( $100, 000).Becauset hei nterestr ater egularl
yr esetst o
mar keti nter estr ates,t hef airv al
ueoft heliabilityr emai nsappr oxi matelyconst antirrespect i
veofhowmar ket
i
nter estr ateschange.Howev er,Berrywishest oconv ertthefloat ingratepay ment st of ixedr atepay ment sin
ordert ohedgei t
sexposur et ochangesi ncashf l
owsduet ochangesi nmar ketinterestr atesov erthel i
feof
thel i
abi l
ity
.
Tohedget heexposur e,Ber ryent ersint
oaf i
v e-yeari nterestr ateswapunderwhi cht heent i
typay sf i
xedr ate
pay ment s( 5%)andi nr eturnr eceiv
esf l
oatingr atepay ment st hatexact lyoffsetthef loati
ngr atepay ment si t
makesont hel i
abili
ty .Ent i
tyBdesi gnat
esanddocument stheswapasacashf l
owhedgeofi tsexposur et o
variablei nter estpay ment sont hebond.Onent eringi ntot heinter estrateswap, i
thasaf airvalueofzer o.The
effectoft hati nterestr ateswapi stoof f
sett heexposur etochangesi ninterestcashf l
owst obepai dont he
l
iabilit
y .I
nef fect ,t
hei nterestr ateswapconv ertst hel iabili
ty’
sf loatingratepay ment si ntof i
xedr atepay ment s,
therebyel i
mi nat i
ngt heent i
ty’sexposur etochangesi ncashf lowsat tri
butablet ochangesi ni nter
estr ates
resultingf rom t heliabi l
i
t y
.Att heendof2016, thei nterestratequot edat6%.
Att heendof2016, thebondhasaccr uedinterestof$6, 000.Ber ryLt dmakest hisjournal ent r
y:
I
nter
estexpense Dr6,
000
To Cash 6,
000

Atthesametime,anetint
erestpaymentof$1,
000hasaccr
uedundert
heswapf
ort
hey
ear
.Ther
efor
e;:
Cash Dr 1, 000
ToI
nter
estexpense1,000

Thenetef fectonpr ofi

torl
ossi sfixednetinterestexpenseof$5,
000( =6,000–1, 000)
.Becauset heswapi sa
deri
vative,i
tismeasur edatf ai
rvalue.BerryLtddet ermi
nesthatt
hef airvalueoftheswap( excl
udi ngaccrued
i
nterest)hasi ncreasedby$6, 800.Ast heswapi sdesignatedasahedgi ngi nstr
umentinacashf lowhedge, the
changei nfairvaluei snotrecognizedinpr ofi
torlossbutasasepar atecomponentofequi tytot heextentthe
swapi sef f
ective.I
nt hi
scase, Enti
tyAdet erminesthattheswapis100%ef fect
ive.
Journalentry:
Swapasset Dr 6, 800
ToEqui ty(hedgingreserve)6,8200  Equi t
y/OCI/Hedgi ngReser v es
Becauset hef airvalueoftheswapwi l
lconverget ozerobyitsmat uri
ty,thehedgingreser
vef ort heswapwi l
l
al
soconv ergetozer obyitsmat uri
tytotheext entthehedgeremainsi nplaceandi seff
ecti
ve.

ValueofSwap=Agai nVal
ueofFix–ValueofFloat
ing
V(Float
ing)=Faceval
ue=$1,00,
000
V(Fix)=5,000Cum PVF(
6%,9)+1,00,
000PVF(6%,9)=$93200