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Derivative Financial Instruments create rights & obligations that have the effect of
transferring between the parties to the instrument the financial risks inherent in an
underlying primary financial instrument.
CHARACTERISTICS OF DERIVATIVES:
1. The value of the derivative changes in response to the change in an underlying
variable.
2. The derivative requires either no initial net investment or an initial net investment.
3. The derivative is readily settled at a future date by a net cash payment.
HEDGING: designating one or more hedging instruments so that the change in Fair Value
or cash flows is an offset, in whole or in part, to the change in fair value of cash flows of
a changed item.
HEDGING INSTRUMENT: the derivative whose fair value or cash flows would be expected
to offset changes in the fair value or cash flows of the hedged item.
HEDGED ITEM: is an asset, liability, firm commitment, highly probable forecast
transaction or net investment in a foreign operation.
MEASUREMENT OF DERIVATIVES:
-
@ Fair Value
Both the fair value & notional shall be fully disclosed.
A gain or loss is recognized when there is change in the fair value.
@ COST
o purchase price
o costs directly attributable to bringing the asset to the location & condition
necessary for it to be capable of operating in the manner intended by the
management.
o Initial estimate of the costs of dismantling & removing the item & restoring the
site on w/c it is located.
MEASUREMENT AFTER RECOGNITION:
-
COST MODEL: cost less any accumulated depreciation & any accumulated
impairment loss.
REVALUATION MODEL: Fair Value at the date of revaluation less any subsequent
accumulated depreciation & subsequent accumulated impairment loss.
SAMPLE:
Name:
Score:
Galido Company requires 20,000 kilos of soya beans each month in its operations. To
eliminate the price risk associated with the purchase of soya beans, on Dec. 1, 2014, the
entity entered into a futures contract as a cash flow hedge to buy 20,000 kilos of soya
beans at P150 per kilo on March 1, 2015.
The market price on Dec. 31, 2014 and March 1, 2015 is P160 per kilo. The appropriate
discount rate is 9% and the present value of 1 at 9% for one period is .917.
What amount should be recognized on Dec. 31, 2014 as derivative asset or liability?
_____________________
At the beginning of the current year, Alabat Company traded in an old machine having a
carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new
machine having a cash price of P2,050,000. What amount of loss should be recognized
on the exchange? _____________________
Name:
Score:
Galido Company requires 20,000 kilos of soya beans each month in its operations. To
eliminate the price risk associated with the purchase of soya beans, on Dec. 1, 2014, the
entity entered into a futures contract as a cash flow hedge to buy 20,000 kilos of soya
beans at P150 per kilo on March 1, 2015.
The market price on Dec. 31, 2014 and March 1, 2015 is P160 per kilo. The appropriate
discount rate is 9% and the present value of 1 at 9% for one period is .917.
What amount should be recognized on Dec. 31, 2014 as derivative asset or liability?
_____________________
At the beginning of the current year, Alabat Company traded in an old machine having a
carrying amount of P1,680,000 and paid a cash difference of P600,000 for a new
machine having a cash price of P2,050,000. What amount of loss should be recognized
on the exchange? _____________________