Derivative transaction double entries

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Edpayasugo
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Derivative transaction double entries

Post by Edpayasugo »

Hi, I want to know the DEs for various derivative transactions please, at inception and then through the life;

Forward
If I enter a Forward at FV, then I would have an asset for (Dr) £100 and a liability to pay at (Cr) -£100
If I entered into an offsetting B/S Forward at FV, would I be able to net down the Derivative asset/liability and the AR/AP?

Swap
If I enter into a IRS fixed/float Swap at FV, then I would have two offsetting legs, so I would have (Dr) Asset £100 and (Cr) Liability £100, do I show these gross or net? If net, then there is nothing to reflect that I have entered into this transaction?
As the FV moves through the term, then the A&L valuation would change, and the difference would go through P&L such as;
Asset (Cr £1) £99, Liability (Cr £1) £101, P&L (Dr) £2

Option
If I enter into a Call option at FV then I would have an asset for (Dr) £100 and a liability to pay at (Cr) -£100
But if this Option swung to OTM, then I would no longer have an asset or liability? Because I wouldn't want to purchase an OTM option and therefore have no obligation to pay?

Option Premium
If I enter into a Call option with a Premium of £2 settled up front , then how do I treat the Premium? I would have a derivative asset of £100, liability of £100, and is the £2 just an expense on Day 1?

Thank you.
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JRSB
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Re: Derivative transaction double entries

Post by JRSB »

Wow , you have all these at once! :shock:

One of the points of a derivative is that they have no or low cost/value at inception, and often no cost to enter into, and that the value changes as other underlying things change (FX rates, interest rates) so actually at inception it's easy.
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Marek Muc
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Re: Derivative transaction double entries

Post by Marek Muc »

Derivatives are recognised on a net basis, so you don't recognise gross underlying amounts. See examples on this page, they include basic debit and credit entries:

https://ifrscommunity.com/knowledge-bas ... ccounting/
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nauman
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Re: Derivative transaction double entries

Post by nauman »

You do not have to recognize the asset and liabilities with respect to the notional amount of the derivative. What you carry on your balance sheet is the fair value of the derivative (which is net of receive and pay legs). In absence of any hedge accounting, the fair value changes go to P&L and the corresponding impact on the derivative asset / liability.
DJP
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Re: Derivative transaction double entries

Post by DJP »

nauman wrote: 30 Sep 2020, 08:34 You do not have to recognize the asset and liabilities with respect to the notional amount of the derivative. What you carry on your balance sheet is the fair value of the derivative (which is net of receive and pay legs). In absence of any hedge accounting, the fair value changes go to P&L and the corresponding impact on the derivative asset / liability.
Please note that you cannot recognise the derivatives' legs separately as assets or liabilities. A derivative is a single financial instrument and that is your unit of account. At inception the derivative will have a nil value (in case of forwards or swaps) or a small value (in case of options, relating to the value of the premium paid or received). Subsequently, you have to account for fair value gains or losses in P&L by recognising an asset or a liability, respectively. (Assuming that hedge accounting is not used.)
Edpayasugo
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Re: Derivative transaction double entries

Post by Edpayasugo »

How would a Forward have a Nil value even if it was entered into at FV ? You would have a derivative asset and an obligation to pay, these would offset but are surely separate?

A Swap I agree, so what would you book day 1? Dr Asset Cr payable, and Dr receivable Cr Liability?
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Marek Muc
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Re: Derivative transaction double entries

Post by Marek Muc »

these questions were already answered in this topic, you don't recognise the gross/notional amounts of receivables and payables for a derivative
DJP
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Re: Derivative transaction double entries

Post by DJP »

Edpayasugo wrote: 01 Oct 2020, 14:54 How would a Forward have a Nil value even if it was entered into at FV ? You would have a derivative asset and an obligation to pay, these would offset but are surely separate?

A Swap I agree, so what would you book day 1? Dr Asset Cr payable, and Dr receivable Cr Liability?
The fair value of a forward at inception has to be nil if entered at market rates
Edpayasugo
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Re: Derivative transaction double entries

Post by Edpayasugo »

Ok, so what is your day 1 booking?
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Marek Muc
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Re: Derivative transaction double entries

Post by Marek Muc »

nothing is booked in day 1 for a swap,
for an option, the premium paid is recognised as asset

PS. please don't quote previous post in full, it's redundant (I edited these quotes out)
Edpayasugo
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Re: Derivative transaction double entries

Post by Edpayasugo »

Marek Muc wrote: 01 Oct 2020, 16:54 nothing is booked in day 1 for a swap,
for an option, the premium paid is recognised as asset

PS. please don't quote previous post in full, it's redundant (I edited these quotes out)
I don't think its redundant, I think its much clearer, unless I am mis-understanding you.

Anyway, it seems unusual to not have a record in the books of a transaction when it occurs
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Marek Muc
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Re: Derivative transaction double entries

Post by Marek Muc »

it's not uncommon to have a contract unrecognised on day 1 if you think about it (e.g. most purchase contracts for tangible goods are unrecognised until the delivery takes place)

PS. yes, such quoting is redundant and it clutters the topic
https://ifrscommunity.com/ifrs-forum-qu ... nk-quoting
Edpayasugo
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Re: Derivative transaction double entries

Post by Edpayasugo »

Thank you all for your help, I think this is clear to me now.
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