This session will explain how businesses look at derivatives and their impact on accounting. It will introduce the definition of a derivative as used for accounting purposes and the requirement to report them at fair value.  Participants will study the main differences between the two main accounting models (IFRS and US GAAP) and will understand how these accounting models affect the reporting of derivatives in the balance sheet.

This session will look at how derivatives are different to other financial instruments (ie, loans and securities) and the impact on credit and liquidity risks. Delegates will learn about the implications for accounting and the differences between futures and over-the-counter (OTC) products, between swaps, other linear instrument and options, and between centrally cleared and non-cleared derivatives. Participants will hear how derivatives are aggregated into portfolios, with examples. They will also discover why derivatives are risk-management tools and therefore different to other financial instruments, and how credit risk affects the accounting and reporting of derivatives.

The session will explain the IFRS and US GAAP offsetting criteria applicable to OTC and cleared derivatives trades. Participants will understand key differences, including the concepts of ‘conditionality’ and ‘intent’, and the importance for netting purposes. They will recognize how they apply for OTC and cleared derivatives and understand the importance of ‘legal enforceability’. Delegates will also distinguish between ‘margin’ and ‘collateral’ (including initial margin, variation margin and collateral) and the different roles they play for accounting, regulation and risk management.

This segment will explore how businesses look at derivatives and their impact on accounting. It will analyze the differences between ‘set-off’, ‘netting’ and ‘offsetting’ and their role. Delegates will understand how the metrics to evaluate derivatives either net or gross, used by European and US banks, affect reporting derivatives in the balance sheet, and learn how derivatives are aggregated into portfolios to arrive at a net amount.

Delegates will gain a basic understanding of how swaps and options are valued, including using zero coupon curves, the role of volatility and measuring the time value of options. They will then learn how accounting standards require the application of particular concepts for the valuation of derivatives. This includes identifying the principal market, the most advantageous market, and market participant. The valuation inputs used must also be assessed in terms of the extent to which they are observable in the market, and this affects how derivatives are reported in the fair value hierarchy. This session explains these concepts and considers how they drive disclosure requirements.

This session will look in depth at the accounting implications of various valuation adjustments, including credit valuation adjustment (CVA), debit valuation adjustment (DVA), funding valuation adjustment (FVA) and other valuation adjustments (XVAs). Delegates will gain insights into why various valuation adjustments are necessary to capture the economic impact of counterparty credit risk, own credit risk and funding implications. Other valuation adjustments will also be explored, including those for uncertainty related to valuation models and regulatory capital.

Post course informal networking in central Amsterdam - More information to come.

This module will describe the key micro hedge accounting models applied under IAS 39 and IFRS 9 (fair value hedges, cashflow hedges and net investment hedges) and the requirements that must be met for these models to be used. Hedge designation and documentation requirements will be discussed, as well as the ongoing test for hedge effectiveness to ensure an economic relationship remains between the hedging instrument and the hedging item. The session will also examine the financial-reporting-related disclosures that are relevant for the hedge accounting models.

This module will describe the most common hedge accounting issues that arise for different types of commodities transactions, considering transaction type, initial hedge designation, documentation and ongoing monitoring. Delegates will hear about topics and questions from recent practice and some of the issues that can arise.

There are currently two main portfolio hedge accounting models that are applied for interest rate risk. They apply the fair value and cash flow hedge accounting methodologies to groups of exposures that are bucketed together. For entities within the European Union, there is also an adapted version of IAS 39 that allows some additional flexibility when applying hedge accounting requirements, which is not present in the full IFRS. This module describes the models, looks at how they are applied and highlights challenges that can arise in practice.

The IASB is working to develop a new portfolio hedge accounting model, which follows the risk management approach applied by the entity. This approach has been under development for some time and may result in the publication of an exposure draft in 2024. This session will describe the approach the IASB is proposing and highlight where further work will be required. It will also consider how entities should start thinking about the model, how they could apply it and what preparations they should consider.

Financial Institutions should understand the impact of the proposed model and therefore a discussion about testing the model is fundamental especially for bank’s treasury departments hedging activities. There will be a discussion of the main inputs to test the model:

• Perimeter, risk limits, assumptions & variables to include in the model
• Assets (including prepayable ones) and liabilities (including core deposits) in scope: behavioral patterns
• Issues arising for banks applying modelling of own equity
• Risk mitigation targets and designated derivatives: DRM adjustments and DRM cycles
• Comparability of outcomes and model performance

Firms are increasingly including ESG components into financial transactions in order to meet sustainability targets and how these are likely to be reported. Financial institutions are also progressively participating in crypto assets and derivatives. This session will consider the accounting requirements with respect to crypto currencies and how they are developing. It will also explore the accounting implications of these developments for derivatives, as well as hedge accounting considerations.