ACCOUNTING FOR DERIVATIVES - Trinity University文档.ppt

This is example 1 from Appendix B of the Standard. Derivative is assumed to have no time value. In application, though, the derivative will have a time value component which must be accounted for. ABC expects no ineffectiveness because (a) the notional amount of Derivative Z matches the amount of the hedged inventory, and (b) the underlying of Derivative Z is the price of the same variety and grade of Commodity A as the inventory at the same location. In Case 2, it is assumed that there is no ineffectiveness. DIG Issue A2 concludes that in applying the net settlement criterion the focus should be whether a venue exists that will relieve either party of all rights and obligations under the contract and to liquidate their net positions without incurring significant transaction costs. DIG Issue A3 concludes that market mechanism relates to the contract and not the underlying of the contract. The market mechanism test is applied on a contract-by-contract basis; therefore, the liquidity related to the number of contracts held is not relevant. DIG Issue A10 concludes that an asset can be considered to be readily convertible to cash only if the net amount of cash that would be received from an active market is not significantly less than the amount an entity would typically have received under a net settlement provision. An entity should consider conversion costs to be significant only if they are ten percent or more of the gross sales proceeds at inception of the contract. DIG Issue A14 concludes that generally shares of common stock to be received upon exercise of a warrant are considered readily convertible to cash, as that phrase is used in paragraph?9(c), if the sale or transfer of the shares is restricted by governmental or contractual requirement (other than in connection with being pledged as collateral) for 31 days or less from the earliest date of receipt of the shares or if the holder has the power by contract or otherwise to cause the requirement t