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Derivatives and hedge accounting

BAR Chapter 17 · Area II · Blueprint II.H

Chapter 8 showed why companies hedge. This chapter shows how the hedges are recorded. The Blueprint asks you to identify freestanding and embedded derivatives, recall the hedge accounting criteria and where gains and losses on swaps, options and forwards are presented, and prepare entries for an interest rate swap in a fair value hedge and a cash flow hedge using rates and fair values you are given. Granite Logistics has fixed-rate bonds it wants to make floating and a floating-rate loan it wants to make fixed.

In this chapter

1. What makes a contract a derivative
2. Embedded derivatives
3. Derivatives without hedge accounting
4. Qualifying for hedge accounting
5. Fair value hedge: a swap on fixed-rate bonds
6. Cash flow hedge: a swap on floating-rate debt
7. Other hedges, presentation and disclosure

This chapter has 7 lessons, 50 practice MCQs with explanations and 20 simulations, plus flashcards and a recall sheet.

What this chapter covers

• Freestanding and embedded derivatives
• hedge criteria
• presentation of gains and losses
• interest rate swap entries

Chapter 16: Consolidation topics · Chapter 18: Leases: lessor accounting and special cases