Accounting for Financial Instruments

Preface
1 Introduction
1.1 Introduction
1.2 Scope of the book
1.3 Background
1.4 Concerns over the misuse of financial instruments
1.5 Complexity
1.6 Revenue recognition
1.7 Inappropriate reward incentives
1.8 Protection for shareholders
1.9 Measuring the 'traders' dilemma'
2 Accounting Foundations
2.1 Introduction
2.2 IASB improvements
2.3 The framework
2.4 Fair value or cost
2.5 Artificial volatility
2.6 Cost model
2.7 Cherry-picking
2.8 Subjective valuations
2.9 Proactive vs. reactive
2.10 Goodwill
2.11 Market value accounting
2.12 IFRS and its contribution to banking crises
2.13 IFRS post-Enron
2.14 Conclusion
3 Corporate Governance
3.1 Introduction
3.2 Corporate governance
3.3 Small vs. large shareholdings
3.4 Traders' dilemma
3.5 Moral hazard
3.6 Credit rating agencies I
3.7 Shareholder democracy
3.8 Structured products
3.9 Revenue recognitio
3.10 Non-consolidation
3.11 Credit rating agencies II
3.12 Accounting standards and lobbying
3.13 Investment entities
3.14 Conclusion
Appendix: Constant proportion debt obligations
4 Hedge Accounting
4.1 Introduction
4.2 Accounting for forward contracts
4.3 Accounting pre-IAS 39
4.4 Artificial volatility
4.5 Hedge accounting rules
4.6 Example: Forward rate agreement
4.7 Conclusion
5 Illustrative Examples: Hedge Accounting
5.1 Introduction
5.2 Illustration: Fair value hedge
5.3 Credit spreads
5.4 Cash flow interest rate swaps
5.5 Time value vs. change in interest rates
5.6 Long method fair value hedge
5.7 Foreign exchange hedge
Appendix: Documentation
6 Accounting for Structured Products (Market Risk)
6.1 Introduction
6.2 Risk adjusted return on capital
6.3 Bifurcation rules
6.4 The reward for risk
6.5 Protection for shareholders
6.6 Illustration: The structured products problem
6.7 The accounting treatment under embedded derivative rules
6.8 Past mistakes
6.9 Conclusion
Appendix 6.1: Overview of embedded derivative rules in international accounting

Cormac Butler (London, UK & Hong Kong) is currently an active equity and options trader and a former consultant with Lombard Risk Systems London and has also worked with Peat Marwick and Coopers & Lybrand. He has presented the Accounting for Financial Instruments course for Euromoney for 8 years and worked as a consultant on financial instruments for a major accountancy firm. He has also led seminars with major banks including Salomon Brothers, Robert Fleming and Banque Paribas. He has recently conducted in-house courses for Morgan Stanley, PricewaterhouseCoopers (Holland), Investec (South Africa) and ABB (Switzerland). In addition, he has worked for IIR and Euromoney in Singapore, Hong Kong, Thailand, America Dubai and Saudi Arabia. Cormac graduated from the University of Limerick, Ireland with a degree in Finance. He is the author of Mastering Value at Risk (Financial Times Pitman).