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Accounting for Investments, Volume 1, Equities, Futures and Options

ISBN: 978-1-118-17961-1
832 pages
November 2011
Accounting for Investments, Volume 1, Equities, Futures and Options (1118179617) cover image


The 2008 financial crisis highlighted the need for responsible corporate governance within financial institutions. The key to ensuring that adequate standards are maintained lies with effective accounting and auditing standards. Accounting for Investments: Equities, Futures and Options offers a comprehensive overview of these key financial instruments and their treatment in the accounting sector, with special reference to the regulatory requirements. The book uses the US GAAP requirements as the standard model and the IFRS variants of the same are also given.

Accounting for Investments starts from the basics of each financial product and:

  • defines the product
  • analyses the structure of the product
  • evaluates its advantages and disadvantages
  • describes the different events in the trade cycle
  • elaborates on the accounting entries related to these events.

The author also explains how the entries are reflected in the general ledger accounts, thus providing a macro level picture for the reader to understand the impact of such accounting.

Lucidly written and informative, Accounting for Investments is a comprehensive guide for any professional dealing with these complex products. It also provides an accessible text for technology experts who develop software and support systems for the finance industry.

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Table of Contents

Foreword xiii

Preface xv

Acknowledgments xxi

Chapter 1 Financial Instruments 1

Learning Objectives 1

Accounting Standards for Financial Instruments 1

Definition of Financial Instruments 2

Categories of Financial Instruments 3

Fair Value Measurement Concepts 4

Recognition and Derecognition of Financial Instruments 5

Types of Investments 5

Difference between Investment and Speculation 5

Two Major Standards: U.S. GAAP and IFRS 6

Summary 8

Exercises 9

Chapter 2 Accounting for Equity Investments: Trading 11

Learning Objectives 11

Accounting Standards for Equity Investments 11

Definition of Equity Securities 12

Passive Investments: Less than 20 Percent 13

Significant Influence: 20–50 Percent 15

Controlling Interest—More than 50 Percent 15

Exchange-Traded Securities versus Over-the-counter Securities 16

The Trade Life Cycle for Equity Trading Securities 16

FX Revaluation and FX Translation Process 33

Trade Date Accounting versus Settlement Date Accounting 39

Distinction between Capital Gains and Currency Gains 42

Summary 65

Exercises 67

Chapter 3 Accounting for Equity Investments: Available-for-Sale 75

Learning Objectives 75

Accounting Standards for Equity Investments: Available-for-sale 75

Basic Understanding of AFS 76

The Trade Life Cycle for Available-for-sale Equity 76

FX Translation on AFS Securities 79

Impairment of AFS Securities 79

Summary 114

Exercises 115

Chapter 4 Transfer of Categories 121

Learning Objectives 121

Transfer between Categories 121

Presentation in Income Statement 122

Deferred Tax Effects on Unrealized Gain/Loss 123

Summary 135

Exercises 136

Chapter 5 Equity Derivatives: Theory 141

Learning Objectives 141

Accounting Standards for Equity Derivatives 141

Derivatives in a Financial Security 142

Definition of Derivatives per Accounting Standards 143

Forward Contract 145

Futures Contract 145

Futures versus Forwards 146

Components of a Futures Contract 149

Open Interest in Derivatives Contracts 151

Method of Computing Open Interest 151

What Does Change in Open Interest Indicate? 152

Pricing of a Futures Contract 152

Stock Futures and Index Futures 152

Summary 153

Exercises 154

Chapter 6 Accounting for Equity Index Futures 159

Learning Objectives 159

The Trade Life Cycle for Equity Index Futures 159

Illustrations with FX Translation 165

Summary 212

Exercises 212

Chapter 7 Accounting for Equity Stock Futures 217

Learning Objectives 217

Trade Life Cycle for Equity Stock Futures 217

Illustrations 219

Summary 254

Exercises 254

Chapter 8 Accounting for Equity Call Options 259

Learning Objectives 259

Accounting Standards—Derivative Instruments and Hedging Activities 259

Trade Life Cycle for ETOs—Long Call Non-hedging 260

Illustrations 265

Trade Life Cycle for Exchange-Traded Options—On Writing a Call Option 288

Illustrations 293

Summary 302

Exercises 302

Chapter 9 Accounting for Equity Put Options 309

Learning Objectives 309

Trade Life Cycle for Exchange-Traded Options—Long Put, Non-hedging 309

Illustrations 315

Trade Life Cycle for Exchange-Traded Options—On Writing a Put Option 338

Illustrations 344

Summary 353

Exercises 353

Chapter 10 Equity Options: Hedge Accounting 357

Learning Objectives 357

Accounting Standards—Derivative Instruments and Hedging 358

The Trade Life Cycle for ETOs—Long Put as Hedging 365

Illustrations 372

Summary 412

Exercises 413

Chapter 11 Accounting for Contract for Difference 419

Learning Objectives 419

Definition of CFD 419

Product Features of CFDs 419

The Trade Life Cycle for CFDs 424

Illustrations 432

Summary 470

Exercises 471

Chapter 12 Accounting for Short Equity Investments 477

Learning Objectives 477

Definition of Short Equity Securities 477

Types of Short Sales 478

Process of Short-selling 478

Risks of Short-selling 479

Box Position and Short-selling 479

Rationale of Short-selling 480

Regulatory Requirements of Short Sales 480

Securities Lending 480

The Trade Life Cycle for Equity Short Sales 483

Illustrations 490

Summary 534

Exercises 536

Chapter 13 Accounting for ADR/GDR Investments 539

Learning Objectives 539

Definition of a Depositary Receipt 539

Issuance and Cancellation of DRs 540

DR Ratio and Pricing 540

Benefits of DRs to Issuers 540

Benefits to Investors 540

What are ADR and GDR? 541

Different Types of ADR Issues 541

Risks Associated with Investment in DRs 542

Restricted Programs 543

The Trade Life Cycle for Equity ADR Securities 543

Illustrations 549

Summary 575

Exercises 576

Chapter 14 Presentation and Disclosures 583

Learning Objectives 583

Accounting Standards for Presentation and Disclosure 583

Presentation in Income Statement 583

Differences between U.S. GAAP and IFRS 584

Disclosure Requirements under U.S. GAAP 586

Disclosure Requirements under IFRS 588

Requirements by IFRS 7 589

Statement of Profit and Loss and Equity 591

Other Disclosures 591

Market Risk 595

Summary 597

Exercises 598

Appendix A Basics of Accounting Theory 603

Appendix B Accounting Standards for Financial Instruments 609

Appendix C Financial Statements of Sample Fund 621

Appendix D Glossary of Technical Terms 631

Bibliography 641

Index 643

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Author Information

A graduate of the University of Madras, R. Venkata Subramani is a Chartered Accountant who began his career with a professional accounting firm in Chennai before becoming the Managing Director of Quintegra Solutions Limited from 1994–2004.
Since 2005, he is the Chief Operations Officer of Variman Capital Markets Services Private Limited in Chennai, India. Venkata Subramani manages a team of core finance and accounts professionals and is responsible for the daily operations including the preparation of net asset value (NAV), portfolio valuation and accounting, partnership allocation and accounting, for various global clients.
Venkata Subramani taught at the Institute of Chartered Accountants of India and the University of Madras from 1984–1990. He lives in Chennai with his wife and daughter.
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