Accounting for Investments attempts to give an exhaustive treatment of various accounting entries that should be recorded by any entity holding any financial asset. Over the past two decades there have been several innovative financial instruments from the Street that call for special treatment from the accounting, legal, and regulatory perspective. The accounting requirements are constantly being monitored and enhanced by the regulators and standard setters to provide more transparency in recording and reporting of these financial products.
This book is written from the practical angle and is meant to cater to the needs of accountants as a handbook. The first volume covers equity, futures, and options. It also covers the hedge accounting treatment for equity options, depositary receipts (ADR/GDR), contract for difference (CFD), short selling, and boxed position accounting.
This book assumes that the reader already has basic accounting knowledge. Those who are entirely new to the field of accounting should refer to some basic accounting book before attempting to use this book. However, Appendix A gives an overview of the basic accounting principles and concepts.
The entire trade life cycle of each of the aforementioned financial assets is covered in detail with the accounting entries that should be recorded. For each illustration, the journal entries, general ledger accounts, trial balance, income statement, and balance sheet are presented to give a complete understanding of the accounting treatment. Also, for all calculated numbers the details of such calculations are given. The notes on accounts and presentation and disclosure requirements for derivative products are covered in a separate chapter and not included for each and every illustration. Appendix C gives the complete financial statements for a sample fund with all the necessary notes on accounts and disclosures as required by International Financial Reporting Standards (IFRS).
Even though the investment banking institutions have suffered a serious setback due to the financial crisis witnessed in 2008, banks, hedge funds, and several other financial institutions do resort to trading and investment activities in several financial instruments covered in this volume. The need for comprehensively understanding these financial instruments, including the accounting aspects involved, assumes great importance. Even before the beginning of a trading day, the front office should know the positions of the various financial instruments held by the entity and have the flexibility to obtain detailed breakdown of cost and so on. Technology has made all this possible today at the touch of a button, and technology experts are much sought after to do the needful for these financial institutions. However, in spite of having the domain knowledge in financial products, the technology experts sometimes feel the necessity to have an in-depth understanding of the entire trade life cycle with the accounting treatment that accompanies it. This book proposes to fill the knowledge gap of these aspiring technology wizards and aspiring finance and accounting professionals who want to jump into the banking and financial domain.
An overview of the trade life cycle for each financial instrument is given. However, the reader is advised to refer other resources for a detailed treatment of the trade life cycle from the front office and middle office perspective. The trade life cycle insofar as it relates to the back office—that is, the accounting aspects—is covered in detail with appropriate reference to generally accepted accounting principles (GAAP) requirements. For each financial instrument, the relevant accounting standards that are applicable are given and a comparative chart showing the similarities and differences between the U.S. GAAP and IFRS is given. While the first volume covers broadly equities, equity options, and equity futures, subsequent volumes will cover the other financial instruments.
Key Features and Approach
This book proposes to cover the domain knowledge as well as the accounting treatment for the various financial products. It should be a good addition to the library of books that deal exclusively with the treatment of all financial products handled by financial institutions, banks, hedge funds, and so on, covering the domain knowledge about the respective financial products and the accounting treatment of the same with special reference to the regulatory requirements. A one-point source of information has been needed by the financial services industry for a long time. This book proposes to fulfil that need, as this series of books is aimed at providing that one-point reference.
Throughout this book the approach is to give illustrations and show detailed workings of the same. Wherever there is a computed number, the details of such calculations are given even at the cost of being somewhat repetitive for some advanced readers.
This book is intended for all those who are directly involved in different capacities and roles in the financial sector, which today is one of the largest emerging sectors in the global economy. Since this book deals with the domain knowledge of many of the exotic products that have evolved over the past two decades, it will be of interest to accountants and the non-accountants alike to know about the trade life cycle of these products.
For an advanced user, the book is expected to pro-vide depth, while for a novice this book starts from the fundamentals. This book is expected to cater to the needs of an expert as well as a novice. This series of books starts from the basics for any financial product—defining the product, the way it is structured, its advantages and disadvantages, the different events in the trade cycle—and then discusses accounting journal entries that are passed for the same. Additionally, this book shows how the entries get reflected in the general ledger accounts, so as to a give a macro-level picture for the reader to understand the basics of the effect of such accounting. Last but not the least in importance is the presentation of the results in the final accounts; the income statement and balance sheet are also well covered in this book. Thus this series of books is expected to be extremely useful to an expert as well as a novice, not to mention the ever increasing number of tech consultants who are in great need of such a book.
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