“The accounting for derivatives and complex contracts has been and is a great challenge for executives, accountants, and auditors The need for better explication and clarification of the labyrinthine derivative and hedge accounting rules has never been greater, and Professor Abdel-khalik has risen to this challenge in great splendor This book is not only a tour de force in making a confusing maze of accounting treatments clear and transparent, but it also delves into basic explorations of the nature of risk and uncertainty, as well as an exposition of the many types of derivatives that accounting needs to describe and quantify I highly recommend this book to students who wish to make sense of the accounting for the 21st century’s complex risk transactions.” —Joshua Ronen, Professor, Stern School of Business, New York University, USA “Derivatives complicate the life of accountants enormously, for they make it possible to one thing in many different ways Sometimes the alternatives are clear, and at other times, they are not Accountants can easily find themselves in a quagmire of partially offsetting positions, the risks of which are unclear This book helps enormously It puts accounting for derivatives in a broad context—explaining first the nature of the risks facing individuals and firms, showing next how derivatives can be used to modify risks, and finally explaining accounting rules for disclosing derivatives positions Professor Abdel-khalik writes clearly and provides many interesting examples of the use and abuse of derivatives The book is important for accountants but also for broader audiences wishing to understand the use of derivatives in risk management.” —Hans Stoll, Professor, Owen Graduate School of Management, Vanderbilt University, USA “While existing books devote attention to how practically to report risks, relatively little attention has been given to the new accounting model (the accounting for risk), which the US and IFRS accounting standards ‘for risk’ have helped create Abdel-khalik’s much-needed new book covers this gap What is impressive about this book is its ability not only to increase our knowledge of hedge accounting and accounting for financial instruments but also to provide a robust framework to understand financial instruments, contracts and related issues in order to better comprehend the logic and the use of accounting standards.” —Saverio Bozzolan, Professor of Accounting, University of Padova, Italy A Rashad Abdel-khalik is a Professor of Accountancy and Director at the V.K Zimmerman Center for International Education and Research of Accounting at the University of Illinois, USA ISBN 978-0-415-80893-4 780415 808934 www.routledge.com Cover image: © Lydia Jiang Routledge titles are available as eBook editions in a range of digital formats A Rashad Abdel-khalik With the exponential growth in financial derivatives, accounting standards setters have had to keep pace and devise new ways of accounting for transactions involving these instruments, especially hedging activities This book addresses the essential elements of these developments The early chapters provide a basic foundation by discussing the concepts of risk, risk types and measurement, and risk management This is followed by an introduction to the nature and valuation of free standing options, swaps, forward and futures as well as of embedded derivatives Discussion and illustrations of the cash flow hedge and fair value hedge accounting treatments are offered in both single currency and multiple currency environments, including hedging net investment in foreign operations A final chapter is devoted to the disclosure of financial instruments and hedging activities The combination of these topics makes the book an essential, self-contained source for upper level students looking to develop an understanding of accounting for today’s financial realities Accounting for risk, hedging, & complex contracts Accounting ACCOUNTING FOR RISK, HEDGING, AND COMPLEX CONTRACTS With the exponential growth in financial derivatives, accounting standards setters have had to keep pace and devise new ways of accounting for transactions involving these instruments, especially hedging activities This book addresses the essential elements of these developments The early chapters provide a basic foundation by discussing the concepts of risk, risk types and measurement, and risk management This is followed by an introduction to the nature and valuation of free standing options, swaps, forward and futures as well as of embedded derivatives Discussion and illustrations of the cash flow hedge and fair value hedge accounting treatments are offered in both single-currency and multiple-currency environments, including hedging net investment in foreign operations A final chapter is devoted to the disclosure of financial instruments and hedging activities The combination of these topics makes the book an essential, self-contained source for upper level students looking to develop an understanding of accounting for today’s financial realities A Rashad Abdel-khalik is a Professor of Accountancy and Director at the V.K Zimmerman Center for International Education and Research in Accounting Page Intentionally Left Blank ACCOUNTING FOR RISK, HEDGING, AND COMPLEX CONTRACTS A Rashad Abdel-khalik First published 2014 by Routledge 711 Third Avenue, New York, NY 10017 Simultaneously published in the UK by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2014 Taylor & Francis Typeset in Stone Serif by Swales & Willis, Exeter, Devon Printed and bound The right of A Rashad Abdel-khalik to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Library of Congress Cataloging in Publication Data ISBN 13: 978–0–415–80893–4 (hbk) ISBN 13: 978–0–203–13753–6 (ebk) The FASB material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, USA, and is reproduced with permission The author/editor and publisher gratefully acknowledge the permission granted to reproduce the copyright material in this book Every effort has been made to trace copyright holders and to obtain their permission for the use of copyright material The publisher apologizes for any errors or omissions and would be grateful if notified of any corrections that should be incorporated in future reprints or editions of this book To the memories of my parents, Mohamed and Gamilah, and E J Demaris, Nicholas Dopuch and Leon E Hay, American educators who had significant influence on my life Page Intentionally Left Blank BRIEF CONTENTS List of Illustrations Preface xvii xxiii PART I FOUNDATION CHAPTER Definitions of Risk and Risk Appetite CHAPTER Types of Risk 15 CHAPTER Measurement of Risk 51 CHAPTER Basics of Risk Management 93 PART II INSTRUMENTS 127 CHAPTER 129 An Introduction to Derivative Financial Instruments (Freestanding Derivatives) PART III ACCOUNTING 183 CHAPTER Qualifications for Hedge Accounting 185 CHAPTER Hedge Accounting I (Single Currency) 226 CHAPTER Hedge Accounting II (Single Currency) 291 CHAPTER Hybrid Securities and Embedded Derivatives 333 CHAPTER 10 Currency Types and Risk: Hedging Transaction Settlement Risk 380 CHAPTER 11 Operating and Accounting Currency Risk 424 CHAPTER 12 Risk Disclosure in Financial Statements 428 Appendix to Chapter 1: The Gambler Who Does Not Lose Appendix to Chapter 7: Proposed Changes in the Classification of Financial Instruments Appendix to Chapter 9: The Significance of Embedded Derivatives (The Case of Landsvirkjun, Iceland) 541 Bibliography Index 543 551 512 516 Page Intentionally Left Blank DETAILED CONTENTS List of Illustrations Preface xvii xxiii PART I FOUNDATION ■ CHAPTER Definitions of Risk and Risk Appetite 1.1 Risk and Open Systems 1.2 Risk and Uncertainty 1.3 Risk-Taking Types of Decision Makers: Three Schools of Thought 1.3.1 1.3.2 1.3.3 1.3.4 The Intrinsic School The Extrinsic (Situational) School Comparing the Two Theories The Pragmatic School 1.4 Internal Controls and Risk-Seeking Behavior 1.5 A Summary and Transition ■ CHAPTER Types of Risk 9 10 12 15 2.1 Open Systems and Different Risk Exposures 15 2.2 Qualitative Classification of Risk 2.2.1 Insurability 2.2.2 Diversifiability 2.3 Functional Classification of Risk 2.3.1 Operational Risk and Accounting Controls 2.3.2 Accounting Reporting Risk Exposures 2.3.3 Market (Price) Risk 2.3.4 Credit Risk 2.3.5 Liquidity Risk 2.4 Summary of Key Points 17 17 18 19 19 21 34 45 47 48 Bibliography 547 Regulation S-B) Release Nos 33-7386; 34-38223; IC-22487; FR-48; International Series No 1047; File No S7-35-95 Securities and Exchange Commission (December 19, 2003) Interpretation: Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations 17 CFR Parts 211, 231 and 241 Release Nos 33-8350; 34-48960; FR-72] http://www.sec.gov/rules/interp/33-8350.htm Securities and Exchange Commission (March 2012) Financial Reporting Manual Washington, DC http:// www.sec.gov/divisions/corpfin/cffinancialreportingmanual.pdf Sharpe, W F (1964) Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk, Journal of Finance, Vol 19, No 3: 425–442 Simon, H A (1959) Theories of Decision-Making in Economics and Behavioral Science, American Economic Review, Vol 49: 253–283 Simon, H A (1979) Rational Decision-Making in Business Organizations [The 1978 Nobel Memorial Prize in Economics lecture], American Economic Review, Vol 69: 493–513 Sitkin, S B and L R Pablo (1992) Reconceptualizing the Determinants of Risk Behaviour, Academy of Management Review: 9–38 Smithson, C W (1998) Managing Financial Risk: A Guide to Derivative Products, Financial Engineering and Value Maximization McGraw-Hill, New York Standard & Poor’s “Rating Criteria.” (2012) http://www2.standardandpoor.com/spf/pdf/fixedincome/corporateratings_052007.pdf Stymiest, B and M D Mackinlay (1999) “Five years to the Dey.” Report on Corporate Governance, Institute of Corporate Directors, Toronto Stock Exchange Toronto, Canada http://www.ecgi.org/codes/documents/ 5years.pdf Taleb, N N (2007) The Black Swan: The Impact of the Highly Improbable Random House, New York Terzi, C and I Posta (2010) Review of Enterprise Risk Management in the United Nations System Benchmarking Framework Document No JIU/REP/2010/4, Geneva, p http://www.unjiu org/data/reports/2010/en2010_4.pdf The US Geological Survey uses Triangular Distribution in the Analysis of Undiscovered Petroleum Resources Page 12 of the following source: http://energy.cr.usgs.gov/WEcont/chaps/OP.pdf Tversky, A and D Kahneman (1991) Loss Aversion in Riskless Choice: A Reference-Dependent Model, The Quarterly Journal of Economics, MIT Press, Vol 106, No 4: 1039–1061 United States Government Accountability Office (October 2002) Financial Statement Restatements: Trends, Market Impacts, Regulatory Responses, and Remaining Challenges Report to the Chairman, Committee on Banking, Housing, and Urban Affairs, U.S Senate, GAO-03-138, p 125 http://www.gao.gov/new.items/ d03138.pdf United States Government Accountability Office (July 2006) Financial Statement Restatements: Update of Public Company Trends, Market Impacts, and Regulatory Enforcement Activities GAO-06678, Financial Restatements, p http://www.gao.gov/new.items/d06678.pdf van Drop, J Ren’s, and S Kotz (2002) A Novel Extension of the Triangular Distribution and its Parameter Estimation The Statistician 51, Part 1, pp 63–79 von Bertalanffy, K L (1950a) An Outline of General System Theory, The British Journal for the Philosophy of Science, Vol 1: 134–165 von Bertalanffy, K L (1950b) The Theory of Open Systems in Physics and Biology, Science, 111: 23–29 Whaley, R E (2006) Derivatives: Markets, Valuation, and Risk Management Wiley, New Jersey Zuckerman, M and M Kuhlman (2000) Personality and Risk-Taking: Common Biosocial Factors, Journal of Personality, 68: 999–1029 Zyphur, M J., J Narayanan, R D Arvey, and G J Alexander (2009) Genetics of Economic Risk Preferences, Journal of Behavioral Decision Making, 22: 367–377 Further Reading Allen, L., J Boudoukh, and A Saunders (2004) Understanding Market, Credit, and Operational Risk: The Value at Risk Approach Blackwell Publishers, Boston Altman, E I and V M Kishore (1996) Almost Everything You Wanted to Know about Recoveries on Defaulted Bonds, Financial Analysts Journal, Vol 52, No (November/December): 57–64 Bierwag, G O., G G Kaufman, and A L Toevs (July/August, 1983) Duration: Its Development and Use in Bond Portfolio Management: Financial Analysts Journal, July–August: 15–35 548 Bibliography Bodie, Z., A Kane, and A Marcus (2009) Investments Eighth Edition McGraw-Hill, New York Boyle, P and F Boyle (2001) Derivatives: The Tools that Changed Finance Risk Books, London Cormac, B (2009) Accounting for Financial Instruments Wiley, West Sussex, England Crosbie, P and J Bohn (2003) Modeling Default Risk: Modeling Methodology Moody’s KMV™, New York Crouhy, M., D Galai, and R Mark (2006) The Essentials of Risk Management McGraw-Hill, New York Doherty, N A (2000) Integrated Risk Management: Techniques and Strategies for Reducing Risk McGraw-Hill, New York Dwyer, D W., A E Kocagil, and R M Stein (5 April 2004) MOODY’S KMV RISKCALC™ v3.1 Model: NextGeneration Technology for Predictin9 Private Firm Credit Risk; http://www.moodyskmv.com/products/ files/RiskCalc_v3_1_Model.pdf Eitman, D K., A I Stonehill, and M H Moffett (2010) Multinational Business Finance Twelfth Edition, Pearson Education, Inc., Boston Fabozzi, F J and S V Mann (2010) Introduction to Fixed Income Analytics: Relative Value Analysis, Risk Measures, and Valuation Second Edition Wiley, New York Gregory, J (2010) Counterparty Credit Risk: The New Challenge for Global Financial Markets Wiley, New York Hull, J C (2010) Risk Management and Financial Institutions Second Edition Pearson Education, Inc., Boston Jarion, P (2001) Value at Risk Second Edition McGraw-Hill, New York Katona, G (1953) Rational Behavior and Economic Behavior, Psychology Review, Vol 60 (July): 307–318 Linsmeier, T J and N D Pearson (1997) Risk Measurement: An Introduction to Value at Risk, Accounting Horizons, Vol 11, No 1: 107–135 Markowitz, H M (1959) Portfolio Selection: Efficient Diversification of Investments Wiley, New York McDonald, R L (2009) Fundamentals of Derivatives Markets Pearson Educational, Inc., Boston Mishkin, F (1999) The Economics of Money, Banking and Financial Markets Fifth Edition Addison-Wesley Publishing Co., Boston Officer, L H (1976) Purchasing Power-Parity Theory of Exchange Rates: A Review Article Staff Papers, International Monetary Fund, Vol 23, No (Mar., 1976), pp 1–60 Pearson, N and C Smithson (2002) VAR—The State of Play, Review of Financial Economics, Vol 11: 175–189 Pratt, J W (1964) Risk Aversion in the Small and in the Large Econometrica, Vol 32, Nos 1&2: 122–136 Ramirez, J (2007) Accounting for Derivatives: Advanced Hedging Under IFRS Wiley, West Sussex, England Rayan, S G (2007) Financial Instruments and Institutions: Accounting and Disclosure Rules Wiley, New York Rejda, G E (2008) Principles of Risk Management and Insurance Tenth Edition Pearson Education, Inc., Boston Sadr, A (2009) Interest Rate Swaps and Their Derivatives: A Practitioner’s Guide Wiley, New Jersey Saunders, A and M M Cornett (2008) Financial Institutions Management: A Risk Management Approach Sixth Edition McGraw-Hill, New York Shubert, S and T C Miller (December 20, 2008) “At Siemens, Bribery Was Just a Line Item.” The New York Times http://www.nytimes.com/2008/12/21/business/worldbusiness/21siemens.html?_r=0 Simon, H A (1957) Models of Man Wiley, New York Stoll, H and R Whaley (1988) Futures and Options on Stock Indexes: Economic Purpose, Arbitrage and Market Structure, Review of Futures Markets, Vol 7: 224–248 Trieschmann, J S and S G Gustavson (1998) Risk Management and Insurance Tenth Edition South-Western, Cincinnati Trombley, M A (2003) Accounting for Derivatives and Hedging McGraw-Hill, New York von Winterfeldt, D and W Edwards (1986) Decision Analysis and Behavioral Research Cambridge University Press, Cambridge, United Kingdom Wilmott, P (2007) Paul Wilmott Introduces Quantitative Finance Wiley, New York Other Information Sources Regulators Accounting Standards Codification (ASC): www.fasb.org (All U.S GAAP references are under Accounting Standards Codification since 2000) Alder Financial: Glossary: http://alderfinancial.com/Financial%20Glossary.htm Bibliography 549 International Financial Reporting Standards (IFRS): www.ifrs.org Securities and Exchange Commission (SEC): www.sec.gov (all rulings of the SEC are under this government website) Financial Service Authority (FSA); the United Kingdom regulatory body: www.fsa.gov.uk Websites Relating to Specific Topics “Aegon N V., Floating Rate Perpetual Capital Securities.” http://www.quantumonline.com/search.cfm? tickersymbol=AEB&sopt=symbol Convertibles: SEC educational note on: http://www.sec.gov/answers/convertibles.htm Chicago Board of Options Exchange: https://www.cboe.com/Institutional/IndexFlex.aspx Definitions of four different benchmarks for LIBOR and EURIBOR can be found at http://www.euribor-ebf.eu/ Dictionary http://dictionary.reference.com/browse/risk http://www.rmartin.com/risk_defined.html FASB Derivatives Implementation Group (2001) Statement 133 Implementation Issue C10: http://www.fasb org/derivatives/issuec10.shtml FASB Derivatives Implementation Group (2006) Statement 133 Implementation Issue No A1: http://www fasb.org/derivatives/issuea1.shtml FLEX® Options: https://www.cboe.com/Institutional/IndexFlex.aspx Forms of privately written option and swap contracts: • • http://www.commbank.com.au/business/agribusiness/commodities-risk-management/cotton/consumeroptions.aspx http://www.commbank.com.au/business/agribusiness/commodities-risk-management/wool/consumerswaps.aspx Futures contract specification: An example from CME-NYMEX: http://www.cmegroup.com/trading/metals/ ferrous/hrc-steel_contract_specifications.html Warrant subscription example: London Stock Exchange announcement on warrant subscription: http://www londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11039365 On the history of Chicago Mercantile Exchange since 1989: http://en.wikipedia.org/wiki/Chicago_ Mercantile_Exchange Natural Gas trading: www.naturalgas.org RiskMetrics products: http://www.msci.com/products/riskmetrics.html Shaughnessy Financial Glossary: http://www.shaughnessyfinancial.com/glossary.php?show=y Soybean: Information source: http://entnemdept.ufl.edu/creatures/veg/bean/brown_marmorated_stink_bug htm SEC case of Joseph Jett: http://www.sec.gov/litigation/aljdec/id127cff.htm US Bancorp 6.5% Fixed to Floating Perpetual Preferred Stock (Non-Cumulative): http://www.dividendyieldhunter.com/USBM.html US Treasury Zero-Coupon Curve: http://www.bloomberg.com/apps/quote?ticker=F08203M:IND Variable step-up bonds: An example of: http://www.one-financial.com/en_investment_solutions_variable_ step_up_bonds_series_1.asp Volume of trade and other information: www.isda.org Warrant Subscription: Example: http://www.londonstockexchange.com/exchange/news/market-news/marketnews-detail.html?announcementId=11039365 Annual Reports and Filings with Regulators American Airlines, Form 10-K, 2006: http://sec.edgar-online.com/american-airlines-inc/10-k-annualreport/2006/02/24/section13.aspx Bank of America, 2009: http://www.sec.gov/Archives/edgar/data/70858/000119312509041126/d10k.htm Barclays plc Annual Report 2010: http://group.barclays.com/about-barclays/investor-relations/financialresults-and-publications/annual-reports Coca-Cola, Form 10-K, 2009: http://investing.businessweek.com/research/stocks/financials/drawFiling asp?docKey=136–000104746910001476–1PFCKABMTRA5RALS1H2O2MV0O9&docFormat=HTM&form Type=10-K 550 Bibliography ConnMed, Form 10-K, 2010: http://www.faqs.org/sec-filings/100225/CONMED-CORP_10-K/ Dell, Form 10-K, 2010: http://i.dell.com/sites/content/corporate/financials/en/Documents/fy10-year-inreview/FY10_Form10K_Final.pdf Deutsche Telekom AG, Bonn, Federal Republic of Germany as Guarantor for the Bonds issued by Deutsche Telekom International Finance B.V.: www.telekom.com/static/-/54298/3/mandatory-convertible-bond -2006-si E I Du Ponte de Nemours: http://www.sec.gov/Archives/edgar/data/30554/000003055412000005/dd12312011x10k.htm#s6CE33D84ABB40CA4444DAAD246B0DA62 EADS (European Aeronautic Defence and Space Company) 2010 Annual Report: • • http://www.eads.com/eads/int/en/investor-relations/events-reports/annual-report/2010.html http://applications.eads.com/eads/investor-relations/int/annual-report2010/data/FS_EV_050511_PDFi pdf FDIC (Federal Deposit Insurance Corporation) 2009 Annual Report, IV Financial Statements and Notes: http:// www.fdic.gov/about/strategic/report/2009annualreport/statements_dif_2.html Google, Inc., Form 10-K, 2011: http://www.sec.gov/Archives/edgar/data/1288776/000119312512025336/ d260164d10k.htm HealthSouth, Form 10-Q, March 31, 2011: http://investor.healthsouth.com/secfiling.cfm?filingID= 785161– 11–32 Intel, Form 10-K, 2011; Item 7, p 25: http://www.sec.gov/Archives/edgar/data/50863/000095012310015237/ f54119e10vk.htm#111 Landsvirkjun (Iceland) Annual Reports: http://www.landsvirkjun.com/about-us/reports/ London Stock Exchange: http://www.londonstockexchange.com/exchange/news/market-news/market-newsdetail.html?announcementId=11039365 MidSouth Bank, Form 10-K, 2012: http://www.midsouthbanking.com/pdf/MSB2011–10K.pdf JPMorgan Chase, Form 10-K, 2010: http://www.sec.gov/Archives/edgar/data/19617/000095012311019773/ y86143e10vk.htm Seagate Technology Holdings, Form 10-Q, May 2009, pp 96–97: http://files.shareholder.com/downloads/ SEA/2068719678x0xS1193125–09–100353/1137789/filing.pdf Xerox Corporation (p 97 of the Annual Report and p 185 of Form 10-K for 2010): http://services.corporateir.net/SEC.Enhanced/SecCapsule.aspx?c=104414&fid=73989 INDEX Page numbers in italics refer to tables and figures accounting controls 17, 19–21 accounting reporting risk 22–34 acid test ratio 80–1 ADM (Example) 173, 175 adverse selection 100 Aegon, N.V 349, 351, 375, 378 affirmative covenants (see maintenance covenants) aggregated assets/liabilities 236 aging (loans) 71–2 AIG 179 Air India 113 Air New Zealand 113 airlines 24, 108, 110, 113 AIS 21 standard 388 Alaska Air Group 113 Alfonso, Tony 153 Allfirst Bank 11 alliances 108–9 Allied Irish Banks 11 allowance for bad debt 72 Altman, Edward 84 Altman Z-scores (see discriminant analysis model) American Airlines 24 American Flooring Distributors, Inc (AFDI) 428–36 American-style options 131, 139, 338 amortized cost 234 amortizing bonds 78–80 appreciation (currency) 385–6 Arrow, Kenneth ASC 280 standard 505, 507, 509, 511 ASC 280-1-50-41 standard 507 ASC 280-10-05-3 standard 505 ASC 280-10-10-1 standard 507 ASC 280-10-50-27 standard 508 ASC 280-10-50-42 standard 505 ASC 310 standard 505 ASC 320 standard 24, 25, 540 ASC 360 standard 32, 55 ASC 360-10-20 standard 32 ASC 360-10-32 standard 32 ASC 360-10-35-21 standard 33 ASC 360-10-35-30/33/34 standard 33 ASC 360-10-55-26 standard 54, 55 ASC 360-10-55-27 standard 55 ASC 470-20-55-11 standard 379 ASC 470-55 standard 367 ASC 480 standard 354, 356, 357, 378 ASC 480-10-15-3 standard 355 ASC 480-10-25-14 standard 379 ASC 480-10-S99 standard 356 ASC 815 standard 182, 185, 195, 196, 197, 198, 199, 202, 221, 223, 224, 243, 292, 332, 334, 373, 488, 516 ASC 815-10-15-74 standard 363, 379 ASC 815-10-15-83 standard 353–4 ASC 815-10-50-1 standard 482 ASC 815-10-50-4 standard 484 ASC 815-15-25-26/27/28/29 standard 379 ASC 815-20-25-12 standard 237 ASC 815-20-25-16 standard 249 ASC 815-20-25-29 standard 429 ASC 815-20-25-30 standard 408, 429 ASC 815-20-25-82 standard 136, 146 ASC 815-20-25-84 standard 206 ASC 815-20-35-2 standard 208 ASC 815-20-55-136/137 standard 423, 476 ASC 815-25-40-1 standard 314 ASC 815-30 standard 280, 284 ASC 815-30-55-11A standard 200 ASC 815-40-25-39 standard 379 ASC 820 standard 30, 185, 227 552 Index ASC 820-10-35-59 standard 540 ASC 825-10-50-23 standard 72, 511 ASC 830 standard 36, 388, 392, 408, 423, 453, 457, 497 ASC 830-10-45-2 standard 388 ASC 830-10-45-3 standard 389 ASC 830-10-55-5 standard 389, 477 ASC 840-10-25-2 standard 379 ASC 840-10-25-4 standard 357 ASC 840-10-25-22 standard 379 ask price/quote (currencies) 381 ASR 268 standard 356 asset impairment 32–4 asset transfer 200 asset-backed securities (ABSs) 118 assets 227, 353; classification 517–19 assets/equity ratio 83 ASU proposed standards 494, 497, 516–40 asymmetric default provision 200–1 at-the-money options 133, 134, 181 Aurora Corporation 28–9, 29 available-for-sale (AFS) assets 25, 45, 227, 232, 233, 322–30, 409 average acquisition costs 23 AZIZA, Inc (example) 138 balance of payments (BoP) 382–3, 386 Bank of America 16, 83 Barclays, PLC 10, 156, 188, 215 Barings Bank 11 base currency 380 Basel Accord II 81 Basel Committee on Banking Supervision 19, 20–1 basis points 53–4 Bayes’ Principle of Indifference 51 BB Enterprises (example) 163–5 Beatriz Ltda (example) 295, 296, 298 Beaver, William H 84 Bemmann, Martin 87 Bermudan-style bonds/options 132, 338 Beta distribution 58, 91 BetaCo (example) 298–302, 307, 314 bid price/quote (currencies) 381 bid/ask spread 52–3 bifurcation 224, 357–60, 361, 379 Binomial model 140–5, 141, 143, 181 Black Swan, The (Taleb) 15, 96 Black-Scholes model 136–40, 138, 145, 153, 181 BNP Paribas S.A 349, 378 Boeing Corporation 478–9, 499, 499–500, 506 bonds (debt securities) 129–30 bounded rationality Bowman, E H BraziBikes, Ltda (example) 404–5, 413–21 Brazilian real 423, 476 Bretton Woods Treaty 235, 382 broad markets 53 Bucket Shop law 181 Cadbury Report (U.K.) 94 call options 131 145, 181, 224 call reports 476 call warrants 148 callable bonds 203, 338–40, 358 callable convertible bonds 340–3 capital asset pricing model (CAPM) 102–3 caplets 132 caps 132 case of maximum ignorance 51 cash cushion ratio 89 cash flow hedges 189–90, 211–13, 230–1, 249–50, 260–5, 277–87, 317–22; of forecasted sale 260; overhedge underhedge 249-51, 250; use of floors 325–30 cash settlement 133 Caterpillar Co 500 Cecil Pigou Enterprises, Inc (example) 272–7 Chaebols 109 Cherokee, Inc (example) 277–87 Chicago Board of Options Exchange 133 Chicago Mercantile Exchange (CME) 126, 133 chief operating decision maker (CODM) 508, 509 Chinese renminbi 35–6 CIA World Fact Book 35 Cisco Systems 107 classification; assets 517–19; equity 347; liabilities 519–20 Clea, NV (example) 295–6, 298 Clear Channel 124 clientele concentration risk 505–6 CME Group 182 Coca Cola Company 68–9, 70, 71 collars 132 Colonial Properties Trust 82 Committee of Sponsored Organizations (COSO) (Treadway Commission) 93–4, 503 commodity price risk 34–5, 234–5 Index commodity swaps 167–70 Commonwealth Bank of Australia 167–9 concentration risk 495, 499, 505–9 confidence levels 59, 62 contango (normal backwardation) 251, 289 contingent capital 345 contingent step-up bonds 359 contractual cash flow characteristics 517 conversion ratios; bonds 336–8, 350, 359, 369–74; DECS 346–8 counterparty credit risk 46–7, 496–7 country concentration risk 507 coupon-paying bonds 78–80 covenants (see debt covenants) covered warrants 148 Cox, J C 140 Cox, S 111 Cox-Ross-Rubenstein Binomial model (see Binomial model) credit: concentration risk 505, 510; default swaps (CDSs) 178–9; disclosure 496–501; measurement 82–9; rating agencies 46; rating scores 88–9; risk 45–7, 120–4, 225, 233 credit risk valuation adjustment (CVA) 496, 497 creditworthiness 45, 50 critical path method (CPM) 56, 57 critical terms (hedge effectiveness) 206 cross-currency quotes 381 cross-currency swaps 445–6 cumulative (preferred stock) 350, 356, cumulative translation adjustment 468, 476, 473 currencies (see also exchange rates) 35, 235, 380–1 currency; appreciation/depreciation 385–6; basis swaps 445; functional 388–90; hedges 407–21, 426–44; operating risk 37, 236, 392, 425, 426; risk 35–7, 235–6, 391–407; swaps 182, 444–58; transaction-settlement risk 392, 393–407; translation risk 236, 392–3, 458–75 current exchange rates 387 operations exposure 393 current rate method (currencies) 387, 462, 463, 464 daily earnings-at-risk (DEaR) measures 72 Daiwa Bank 10 Damodaran, A 89 debt covenants 46, 120–4, 337 debt exchangeable for common stock (DECS) 343–8, 345, 378 debt risk valuation adjustment (DVA) 496, 497 553 debt securities (see bonds) declining payoff zone 344 de-designate (hedge) 239, 314, 477 default risk 54, 82 definitions; credit risk 45, 496; derivatives 29–30; financial instruments 353; fraud 49; functional currency 388; hedging 109; interest rate gap 73–5; LIBOR 167; liquidity risk 47; operational risk 19; risk 4–5; uncertainty 4–5 Dell Inc 69, 70, 71 Deloitte 96 Delta Airline 126 depreciation 24; accruals 24; currency 385–6, 403; in the Euro 110 derivatives 111, 130–1, 216–21, 226; use as hedges 188–92; use as investments 186–8; volume 213–16 Derivatives Implementation Group (DIG) (FASB) 217–21 detachable warrants 148, 149, 154–5, 335, 366–7 Deutsche Bank 115 Deutsche Telekom AG 344–6, 347, 347–8 Dey Report (Canada) 94 differential swaps 445 DineEquity 502–3 direct currency quotes 380, 423 Disarming the Value Killers (Deloitte) 15 disclosure 478–9; concentration risk 505–9; credit risk 496–501; liquidity risk 491–6; market risk 482–91; operational risk 501–5; strategic risk 479–82 discriminant analysis model (credit risk) 84, 87,88, 91 distance to default 85 diversification 64–8, 102–8 documentation 158, 189, 204 Dodd, D 18 dollar offset method/ratio 207–11, 324 Dominion Resources, Inc 114, 188, 495, 498–9 downside risk 111–12 Du Pont 481–2 duration measures 72, 76–80, 79, 492 earnings-at-risk (EaR) measures 72 economic capital allocation 16 economic exposure 393 effective dates 520 effective notionals 224 effectiveness (see hedge effectiveness) 554 Index Eicher Ltd 107 embedded call options 224 embedded derivatives 203–4, 289, 334, 335, 352, 353, 354, 360, 361–3 Encyclopedia Britannica 109 Enron 20, 501 enterprise risk management (ERM) 93–4 Environmental Protection Agency 13 Enya, Inc (example) 245 equities/equity securities 129, 354–5 equity risk 44–5 equity-linked notes (ELNs) 348–9 equity-linked securities (ELKSs) 334 “ERM” acronym 125 estimated default frequency (EDF) 86 EURIBOR 167, 181 European Aeronautic Defence and Space (EADS) Company 69–70, 71 European Group of Auditors’ Oversight Bodies (EGAOB) 95 European-style options 131, 139, 338 event-driven redemption 338 exchange rates 35–7, 380–91, 459–60 executory contracts 234, 288 Expected Utility Theory 7, exporting energy (Open System Theory) 15 extreme gain/loss condition 375 extrinsic (situational) school (in risk taking) 6, factoring 116; comparison with securitization 120 fair value 30–1, 43, 185–6, 227, 378, 444, 520 fair value hedges 189, 230, 234, 237, 265–77, 322–5 falsification of profits 13 Fama, E F 19 Fannie Mae 26–7 FAS 52 standard 36, 388, 408 FAS 115 standard 25 FAS 133 standard 221, 292, 423 FAS 150 standard 378 Federal Deposit Insurance Agency (FDIC) 22–3, 83 Federal Funds Rate 182 Federal Reserve Bank of San Francisco 15 Financial Accounting Standards Board (FASB) 516–34 Financial Aspects of Corporate Governance, The 125 financial assets/liabilities (see assets, liabilities) Financial Executive Research Foundation 93 financial position exposure 393 Financial Reporting Manual (SEC) 479 Financial Service Authority (U.K.) 94 Financial Statements Only (FSO) model 84–5 firm (binding) commitments 182, 225, 436–44 firm value 75 Fisher, Larry 78 Fisher effect 384 Fitch Ratings 81, 91 fixed charge ratio 81–2 fixed-for-fixed 347, 373, 377, 379, 446, 450 fixed leg (swaps) 156, 165, 181, 301–2 fixed-for-floating swaps 156–7 fixed-rate instruments 40–3, 157–8, 228–9, 229, 240–4, 292 measurement of risk 73 FLEX (flexible) options 149–51, 181 floating leg (swaps) 156, 164–5 floating-for-flofiating swaps 167 floating-rate assets/instruments 38–9, 228–9, 229, 241–4; measurement of risk 73, 79 floors 132, 180, 325–30 FlowinWaters Enterprises (example) 446–58 Foreign Corrupt Practices Act (FCPA) 20, 94, 503 foreign entities 388, 391 Foreign Exchange Committee (FEC) 424–5 foreign operations 190–2, 460–2 foreign-currency-denominated commitments 437–8 Forex markets 423 forward contracts 170–5, 182, 198, 200, 363–4; compared to futures contracts 176–7 forward currency contracts 438 forward points 415 forward premiums 173, 175, 182 forward prices 171, 172, 173, 182, 251 Freddie Mac 26–7 freestanding instruments 173, 203, 215, 218–20, 347, 353, 354, 389–91 French, K R 19 functional currencies 387–90, 460–5 futures contracts 176–8, 198, 251–9; comparison with forward contracts 176–7 Futures Exchange 198 GAAP (Generally Accepted Accounting Principles) (see also ordinary GAAP) 226 Gap, Inc 123 gap measures (see interest-rate-gap measures) Garvey, M 89 gearing ratios 83 General Electric (GE) Corporation 96, 98, 107–8, 156, 169, 181, 403, 411, 412–13 Index General Motors 151–2, 504 Gold Standard 382 Google, Inc 479 Government Accountability Office (GAO) (USA) 28–9 Graham, Benjamin 4, 18 Greeks (options) Suite 144 guaranteed mandatory convertible bonds 344–5 Hammurabi Code 13 hard calls 341 harmless warrants 147 HealthSouth 21, 49 hedge accounting/hedging 80, 109–14, 192–5; comparison with insurance 113; designation/definition 195, 196–201, 303–4; documentation 195, 204; effectiveness 196, 204–11, 304–7; GAAP/IFRS requirements 185–6, 195; scope 195, 201–4; termination 314–16; use of derivatives 188–92 hedge derivatives 187 hedgeable risks 111, 228, 231–7 hedging: aggregates/partial 236; cash flow volatility 231; loss in value 230; natural 110–1; of forecasted transaction 190 held-for-trading assets 25, 227, 232 held-to-maturity (HTM) securities 25, 233 high impact/low frequency events 16 high-quality assets 81 Holton, G A 5, 61 host (base) contracts 334, 335 human resource risk 51 hybrid instruments/securities 44, 130, 203, 334, 335–54, 352, 353, 357, 361 hypothetical derivatives 211, 280, 289, 332 IAS 14 standard 506, 511 IAS 21 standard 36, 391, 392, 408, 453 IAS 28 standard 540 IAS 32 standard 292, 356, 378 IAS 39 standard 185, 196, 227, 243, 292, 334, 423, 482 IAS 133 standard 185 IBM 83, 156, 181, 182, 190, 212–13, 216, 495, 509 idiosyncratic risk 45 IFRS (International Financial Reporting Standards) 226, 243 IFRS standard 227, 378, 482, 492, 494, 497, 505 IFRS standard 505, 507, 511 555 IFRS standard 185, 243, 482 Iguchi, Toshihide 10 impairment (see asset impairment) in-the-money options 133, 134, 436 increasing payoff zone 344 indirect currency quotes 380, 423 inflation risk 54 insurable interest 101, 179 insurable risk 99–100 insurance 17–18, 99–101; CDSs 178; hedging 113 Intel Corporation 480–1, 506 Intelligent Investor, The (Graham) Intercontinental Hotel Group (IHG) 95–6, 96 interest rate parity (IRP) 383–4 interest rate risk 37–44, 157–8, 232, 233, 291–8 interest rate swaps 155–66, 169–70, 181, 182, 198, 293–313 interest rate-linked hybrids 375–6 interest-rate-gap measures 72, 73–6, 492, 511 interest-rate-gap ratios (IRGRs) 74 International Finance Corporation 89 international Fisher effect 384–5 International Swap Dealers Association (ISDA) 170, 214, 424 intrinsic (risk taking) school 6–7 intrinsic values; options 133, 135, 136; warrants 335 inventories 23–28 inventory (hedge of) 251–82 Japan 108–9 Japan Airlines 113 Jet Airways 113 Jett, Joseph 11 JPMorgan Chase 68, 70, 71, 115–16, 126, 156, 168, 188, 214–15, 479, 485, 488–90, 494–5, 496–7, 501 JPMorgan Securities 429–35 Kahneman, D Kansas Gas Service 114, 126 Katona, George KChina (example) 438–44 Keiretsu 108 Kerviel, Jerome 12, 13 Kidder, Peabody & Co 11 KMV model (credit risk) 85, 86, 87, 92 Knight, Frank 3, 4–5, 13 Kogan, N 556 Index KonTraG (Germany) 94 Kuhlman, M La Sierra, Inc (example) 297, 298, 317, 319 Laker Airlines 403 Landsvirkjun (Iceland) 116, 391, 408, 541–2 Leeson, Nick 11 levels of fair value 30, 185–6, 223 leverage ratios 82–3 liabilities 228, 233–4, 353, 354; classification 519–20 Liberty Media 124 LIBOR 167, 181, 332 life insurance 100, 126 Lin, Y 111 Lincoln Coach, The (TLC) (example) 512–15 liquidity leverage ratio 81 liquidity measures 80–2 liquidity risk 47–8, 53, 54; disclosure 491–6; management 115–16 Littleton, A C 29 loan loss reserve 72 London Stock Exchange 94, 151 lookback options 132 Lopez, Jose A 47, 98 low-quality assets 81 Macaulay, Fredrick 76 Macaulay duration measure 76–8, 80 maintenance covenants 121 Malthus Farms (example) 265–72 management intent 24–7, 248–9 management’s discussion & analysis (MD&A) 479–82, 491–2 mandatorily redeemable stocks 350, 356–7 manufacturing costs 23 mark-to-management 223 market mechanisms 200 market risk 34–5; disclosure 482–91 Markowitz, Harry M 5, 18, 102 maturity measures/spreads 54, 492 MBIA 179 McClatchy 123–4 McDonald’s Corporation 88, 111, 403, 411, 423 measurement (see quantitative measurement) Merck & Co 411 Merton model (credit risk) 85–6, 87, 89, 92 Mexico 112, 114 mezzanine section 377 micro exclusions 201–2 MidSouth Bank 154–5 Miller, T C 125 Miller, Warren 87 Milsom Farms, Inc (example) 251–65 mismatching assets/liabilities 238–44 mixed-rate assets/liabilities 44 modified duration (ModD) measure 78, 80 money market hedges (MMHs) 403–7 Montague SA (example) 296–7, 298 Moody, John 88 Moody’s 84, 85, 86, 91 Morita, Akio 107 Morningstar 87, 88, 89, 92 mortgage-backed securities (MBSs) 118 naive prediction model (credit risk) 87 naked warrants 148 National Research Council (NRC) 13 National Securities Commission (Argentina) 92 natural gas 182 natural hedging 50, 109–11, 244–8, 403 net assets 466, 467 net realizable value 22, 23, 24 net settlement 133, 199–200 Nike, Inc 506–7 non-cululative (preferred stock) 351, 356, 358 non-detachable warrants 148, 336, 357 normal distribution 57–8, 61 notional amounts 197 Nye, Jason 516 NYMEX 177–8, 182, 224 offer/ask spread (see bid/ask spread) Office of Federal Housing Enterprise Oversight (OFHEO) 27 Office of the Comptroller of the Currency (OCC) (USA) 213, 225 Oneworld Alliance 108, 126 open systems 3, 15 operational risk 19–21 disclosure 501–5 option premiums 135, 138 optional redemption 338 options 131–46, 181, 198; American-style 131, 139, 338; at-the-money options 133, 134, 181; call 131–40, 143–5,181, 224; comparison with warrants 148–50, 152; embedded options 224, 333, 336, 339, 343, 345, 357–9, 368, 377; Index 557 European-style 131, 139, 338; in-the-money 134–5, 149, 135, 180, 358–9, 429, 432–6; intrinsic value 133–8, 141–5, 199, 268, 335–8, 359, 368, 428–37; out-of-the-money 133, 149, 180–1, 198, 337, 345, 436–7, 475; put 131–137, 146–149, 180, 230, 326–28, 342-3, 355, 365, 377, 427; time value 134–5, 180–2, 476; value 136–44, 161 Options Clearing Corporation 133 Options Greeks 145–7 ordinary GAAP 185–6, 226, 243, 246, 248, 289, 360 Orrell, Magnusn 516 other comprehensive income (OCI) 25, 331, 468 out-of-the-money options 133, 181, 436 Ozi Mining, Ltd (example) 394–9 public utilities 114 purchasing power parity (PPP) 383, 423 pure risk 17, 99 put options 131, 132, 134–5, 136, 365–6 put warrants 148 puttable bonds 338 puttable convertible bonds 342–3 P & K, Inc (example) 394–9 Pablo, L R 10 paper losses 477 parallel (back-to-back) loans 400–2, 423 Parisian-type calls 341 partial hedging 236 participating bonds 181 participative stocks 350 Paton, W A 29 payment provision 197 payoff functions, options 134–5 perpetual preferred stocks 350, 355–6 Pharma-R-US/Pharma-R-IN (example) 466–75 physical delivery 133, 199 plain vanilla options 131, 145 plain vanilla swaps 156, 197 PNB Paribas Bank S.A 359 portfolio theory 18 pragmatic school 6, 9–10 preferred shares/stocks 129, 350–2 prepayment risk 232–3 principle of indifference 51 principle of maximum ignorance 17 probability/impact matrices 96–7 product market concentration risk 507–9 program evaluation and review technique (PERT) 55–6, 57 Prospect Theory 8, 9, 10 protection buyers 178, 179 protection contracts 130–1 protection sellers 178, 179 Public Company Accounting Oversight Board (PCAOB) 94–5, 504 Recoverability Test 32–3 redeemable preferred stock 350, 356 reference entities 178 refunding 379 regression analysis 209–11 remeasurement (currencies) 388, 462 replacement cost insurance 100 reporting currencies 390–1, 459, 461 reporting entities 390–1, 460 repricing 492 reputation risk 51 requirement contracts 197 retractable stocks 350 risk: appetite 10; averse type 7–8; avoidance 98–9; definition 4–5; factors 478; insurable 99–100; neutral type 7–8; proclivity type 7–8; sharing 5, 17; speculative 17, 99; transferring 5, 98–9 RiskMetrics 61, 91 Roggi, O 89 Ross, S A 140 Rubinstein, M 140 Rusnak, John 11 qualified spread differentials (QSDs) 158–61 quantitative measurement 51 quanto options 132 quasi-value-at-risk (quasi-VaR) measures 72 quick ratio 80–1 quote currency 380 Qwest Communications International 28 safe harbor provisions 510 Sarbanes-Oxley Act (SOX) 20, 94, 501, 502, 503, 504 satisficing (decision making) Schubert, S 125 Seagate Technology 122–3 securities 129–30 Securities Act (1933) 478 Securities and Exchange Commission (SEC) 152, 479–80, 510 Securities Exchange Commission Act (1934) 478 558 Index securitization 116–19; comparison with factoring 120 segment information 508–9 self-insurance 99 settlement: by physical delivery 133; derivative contracts 198–201; net 133; provision 196, 219; the nature of 170 SFAS standard 423 SFAS 52 standard 423 SFAS 131 standard 511 share repurchase 363–5 Sharpe, W F 18, 102 short-cut method (hedge effectiveness) 205–6, 223 Siemens 125 Simon, Herbert 9–10 sinking fund redemption 339 Sitkin, S B 10 Société Générale 12 soft calls 341 Sony 107 South Korea 109 Southwest Airlines 113 special purpose entities/vehicles (SPEs/SPVs) 118–19 speculative risk 17, 99 spot exchange rates 387 spot prices 133–4, 171–2 SPPI criterion 517, 518–19, 540 spreads 53–4, 89–90 stable payoff zone 344 Standard & Poor’s 89 standard deviations 58, 65 standard normal distribution 58 Star Alliance 108 statement of financial position 520 step-up bonds/instruments 349–50, 358–9 strategic risk 15–16, 49; disclosure 479–82 stress testing 492 strike prices 133–4 STRIPS securities 13 subrogation 101 swaps: circus 445; contracts (see also commodity swaps, currency swaps, interest rate swaps) 155–70, 181, 182; fixed-for-floating 156–7, 167, 296–7; fixed-for-fixed 446; floating-for-floating swaps 167; rates 477; spreads 54; valuation 165–7; wool swaps 168–9 SwapBank (example) 317–22 SwapWhale, Ltd (example) 299, 302, 307, 315 symmetric default provision 199–200 systematic risk 18–19 Taleb, Nassim 96, 97 temporal method (currencies) 387–8, 463, 464 temporary capital 345 thin/broad markets 53 three-factor model 19 throughput 15 time value, options 135, 136, 476 Time Warner Cable, Inc 339–40 Toronto Stock Exchange 94 trading derivatives 187, 188 trading securities 25 Transense Technologies 151 translation (currencies): of financial statements 387; risk 36–7; versus measurement 388 Treadway Commission 93, 125, 503 triangular distributions 54, 91 Trueblood Report 29, 50 Turnbull Report (U.K.) 94 Tversky, A UImporte Company (example) 404–6, 413–21 umbrella exclusions 201–2 underlying assets 181, 196 Unlimited Chips Company (example) 326–7 U.S Airways 113 U.S Treasury Rate 332 USKitchen Company (example) 438–44 valuation: forward contracts 171–2; interest rate swaps 161–6; options 136–44; securities 130; swaps 165–6, 301–3; warrants 153–5 value insurance 100, 126 value-at-risk (VaR) measures 60–72, 485–6, 511; effect of diversification 64–8, 69–70; limitations 68 variable penalties 199 variances 58 vega 181 volatility 5–6, 102, 103 von Bertalanffy, Karl Ludwig Wal-Mart Stores, Inc 490 Wallach, M A warrants 148–55, 335, 366–8 weather derivatives 181 wedding warrants 148 Index “when issued” securities 224 World Bank 156, 181, 182 WorldCom 27 XAR, Inc (example) 364–5 Xerox 351–2 yield curves 91, 332, 492 yield spreads 54 Z-distribution (see standard normal distribution) zero-coupon bonds 76–80, 161–3 Zuckerman, M 559 Page Intentionally Left Blank Taylor & Francis eBooks FOR LIBRARIES Over 23,000 eBook titles in the Humanities, Social Sciences, STM and Law from some of the wo rld's lead ing imprints Choose from a range of subject packages or create your own! , Free MARC records , COUNTER-compliant usage statistics , Flexible purchase and pricing options , Off-site, anytime access via Athens or referring URL , Print or copy pages or chapters , Fu ll content search , Bookmark, highlight and annotate text , Access to thousands of pages of quality research at the click of a button For more information, pricing enquiries or to order a free trial, contact your local online sales team UK and Rest of World: online.sales@tandf.co.uk US, Canada and Latin America: e-reference@taylorandfrancis.com www.ebooksubscriptions.com A l=::•lr U'SPAwotdfOI We1~~ = -== -' @ • Taylor & Francis Taylor & Francis Croup r.~:r.m~ .. .ACCOUNTING FOR RISK, HEDGING, AND COMPLEX CONTRACTS With the exponential growth in financial derivatives, accounting standards setters have had to keep pace and devise new ways of accounting. .. Director at the V.K Zimmerman Center for International Education and Research in Accounting Page Intentionally Left Blank ACCOUNTING FOR RISK, HEDGING, AND COMPLEX CONTRACTS A Rashad Abdel-khalik... are putting forward thoughts and ideas for debate Anonymous Derivatives and hedging represent one of the more complex and nuanced topical areas within both US GAAP and IFRS IFRS and US GAAP: