US GAAP Accounting for Derivatives and Hedging (2 days)

Introduction

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This comprehensive two-day course provides an overview of the most important accounting and reporting requirements for derivatives and hedging activities in accordance with Topic ASC 815 (FAS 133, 138, 149, 150, 155, 156, 159, ASU 2017-12, and related pronouncements under US GAAP).

The course includes a review of significant accounting policies and necessary disclosures, in accordance with the pronouncements of:

• The Financial Accounting Standards Board (FASB)
• The Securities Exchange Commission (SEC)
• The Emerging Issues Task Force (EITF)

These requirements are explained in clear, simple language and illustrated with model journal entries, corporate annual reports, and other real-world examples. Application of the various standards is illustrated through the use of short case studies.

In addition to a review of current US GAAP developments, course participants receive information on likely future pronouncements and the probable impact of their adoption.

This course answers questions such as:

• What are the current and likely future requirements for hedge accounting under US GAAP?
• What is the probable impact of adopting new or proposed requirements?
• How are effective hedges designed, documented and tested?
• How are embedded derivatives identified and accounted for?
• What are the principal similarities and differences between US GAAP and IFRSs in the area of derivatives and hedge accounting?

Learning Objectives

• Understand the reasons why companies hedge
• Comprehend how to construct a successful hedge
• Learn how to assess hedge effectiveness
• Identify and account for fair value and cash flow hedges
• Apply appropriate accounting treatment to interest rate swaps and foreign currency hedges
• Comply with the accounting requirements for embedded derivatives
• Identify derivatives that qualify for the scope exception
• Become familiar with recent pronouncements and current issues

Who Should Attend

This course is primarily designed for those who use derivatives and hedge accounting under US GAAP (Topic ASC 815 and related pronouncements) in their company or are considering doing so in the future:

• Accountants in an investment bank or treasury operation/internal audit in a bank
• Individuals working in non-banking entities where they are considering hedge accounting for the first time
• Industry controllers, external auditors, analysts, financial engineers and other finance professionals who are interested in learning about derivatives and hedge accounting

Topics

• Introduction to Derivatives and Hedging
  • Decision - to hedge or not to hedge?
  • Economic hedges vs hedge accounting
  • Derivatives - risk management tools or dangerous financial contracts?
• Fundamentals of Hedge Accounting
  • Fundamental principles and requirements
  • Fair value Hedges
  • Cash flow hedges
  • Net Investment hedges
• Designing Effective Hedges from an Accounting Perspective
  • Forward Contracts
  • Swap Contracts
  • Non-derivative contracts
  • Options, caps, collars, and floors
• Effectiveness Testing
  • Critical terms analysis
  • Short-cut method
  • Correlation and frequency analysis
  • Hypothetical derivative method
  • Dollar offset method
• Fair Value Hedges
  • FX risk
  • Interest rate risk
  • Price risk
  • Firm commitments
  • Earnings impact
• Cash Flow Hedges
  • FX risk
  • Interest rate risk
  • Price risk
  • Forecasted transactions
  • Treatment in Other Comprehensive Income (OCI)
• Hedge Accounting
  • Requirements for qualifying
  • Hedge accounting mechanics
  • Departures from GAAP for fair value hedges
  • Accounting impact of breaking the hedge
• Scope Exclusions
  • Normal purchases and sales
  • Traditional insurance contracts
  • Financial guarantees
  • Others
• Interest Rate Hedges
  • Fixed to floating rate swaps
  • Floating to fixed rate swaps
  • Cross Currency swaps
• Foreign Exchange Hedges
  • Receivables and payables
  • Investments and debt
  • Firm commitments
  • Forecasted transactions
  • Net investments in foreign subsidiaries
  • Intercompany transactions
  • Using non-derivatives
• Embedded Derivative
  • Hybrid securities
  • Testing for bifurcation
  • 'Clearly-and-closely-related' criteria
  • Dominant economic component test
  • Accounting for embedded derivatives
  • Valuing embedded derivatives
• Recent Developments and Pending Changes to Hedge Accounting
  • ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities
  • Risk component hedging
  • Accounting for the Hedged Item in Fair Value Hedges of Interest Rate Risk
  • Recognition and presentation of the effects of hedging instruments
• Comparisons with IFRS
  • Firm commitments
  • Basis adjustment on forecasted transactions
  • Use of non-derivative hedging instruments
  • Hedging combined interest rate and currency risks
• Reporting and Control Environment
  • Financial risk management
  • Separation of duties
  • Auditing procedures
  • Disclosures

Teaching Method

• Group live instruction with interactive participation encouraged
• Description and explanation of US GAAP accounting principles
• Practical illustrations using model journal entries, model financial statement disclosures, case studies, and real-world examples
• Discussion of current and pending issues
• All participants receive a comprehensive binder containing copies of the presentation slides, handouts and other course materials
• Electronic copies of exercise and case study solutions will be available to participants

Instructors

Venue

CPE/CPD Accreditation

IASeminars is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

 

Field of study: Accounting

Prerequisites

Understanding of basic US GAAP accounting and reporting principles. No advance preparation is required for this course.