TRAINING PROGRAMS

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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.

Intended Audience
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.

This handbook provides a basic foundation with deep insight into the current global economic and financial crisis. The author has effectively employed a user-oriented approach to illustrate the complex mechanics of financial accounting for investments in a dynamic, volatile environment. With clear writing and pragmatic yet detailed guidance, this is a good resource for a novice researching accounting for equity investments.  No library, investment advisor or CPA practitioner should be without this handbook in their collection.

Prof. (retd.) Girish G Yajnik : alumni of USC Darla Moore School of Business and a research faculty member of University of South Carolina.

INTERVIEW R VENKATA SUBRAMANI, FINANCE EXPERT

‘We need innovative financial products that are devoid of gambling elements’

Saikat Neogi 
Posted: Saturday, Sep 26, 2009 at 2126 hrs IST

The global financial crisis has underlined the need for responsible corporate governance. Many of the nuances are explained in R Venkata Subramani’s latest book Accounting For Investments: Equities, Futures and Options published by John Wiley and Sons. A chartered accountant by profession, Subramani is the chief operations officer of Chennai-based Variman Capital Markets Services and is responsible for valuation and accounting, partnership allocation and accounting for companies. He has also taught at the Institute of Chartered Accountants of India and the University of Madras. Subramani in an interview to FE’s Saikat Neogi explains the changes in the accounting process after the global slowdown, credit default swaps and peer review of accounts. Excerpts:

How has the financial crisis underscored the need for greater responsible corporate governance within financial institutions?

It is now a known fact that some large financial institutions did push under the carpet certain losses in some innovative products either to dress up the periodical results or to protect employee bonuses. When the already inflated and heated up markets developed cracks, these unhealthy practices came to the limelight as these could no longer be covered up. The losses snowballed with domino effect, resulting in all round lack of trust amongst the financial institutions per se, which aggravated the situation calling for bailout measures from the government. Though this originated in the US, some of these events replicated in other parts of the world. Perhaps, a lot of these could have been minimised if there were a greater responsible corporate governance within financial institutions.

What are the accounting lessons that one can learn from the global economic crisis?

Accounting is based on common sense. If something defies common sense, it obviously cannot stand the test of time. Accounting standards are designed to provide uniformity in accounting and reporting and to ensure adequate disclosures are made about all aspects of material transactions. The lesson that one needs to learn from this crisis is that the regulatory compliance and reporting and disclosure requirements set forth in accounting standards should be followed in spirit for their own welfare in the long run or else it will boomerang on the entire financial community sooner than later. If there is a trouble, it’s better to bring it to limelight soon and never resort to cover up by applying ‘accounting skills’.

What kind of innovations are called for in the global financial institutions in the near future?

The Street is known for its creative and innovative financial instruments to cater to the risk appetite of every type of investor. Some financial instruments like the credit default swap (CDS), which have become extremely popular since 2000, have been suffering from certain serious flaws. Some economists and financial experts have been harping about the dangers of these products and unfortunately the whole world has been forced to learn a lesson in a very hard way. These inputs will undoubtedly force the global financial institutions to think and come up with innovative products that are devoid of gambling elements.

How can the government reform the financial sector? What kind of checks and balances are needed?

OTC products should be regulated. The financial sector has created several innovative products to take care of the requirements of different types of investors on the one hand and the issuers on the other. In all these, the government has to ensure that unchecked and over ambitious greed on the part of investors does not affect other investors. In other words, while investors with risk appetite should be fed with products that suit their requirements, the loss if any suffered by those investors should be protected by being adequately funded—not causing any domino effect on other investors. The exchange traded products usually ensure this. The government should ensure the same level of safety through appropriate means to both the counter parties of even OTC products. This will go a long way in ensuring financial stability and effectively acting as a shock absorber against any financial crisis.

Will the credit derivatives market regain investors’ confidence?

Not immediately in the present form. Credit derivatives in the present form may not regain investors’ confidence. There is a proposal to ban credit default swap in its present form. India has been very wise in staying away from this devastating product by the good efforts of RBI. In fact, CDS has been one of the main reasons for the present global financial crisis. CDS in the present form suffers from some serious flaws. There is no requirement of insurable interest for this product, turning it into a convenient form of gambling. Look at the numbers — the notional amount of CDS outstanding at the end of 2007 was around $62 trillion as compared to around $25 trillion of the total fixed income securities issued in the US, indicating the gambling element. Unless these flaws are eliminated, credit derivatives are unlikely to regain investors’ confidence.

Product Description

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.

Another contributing factor is speculation in residential real estates. During housing boom, homes were increasingly bought with an intention of investment instead of primary residences.

This resulted in homes being purchased while under construction, and then sold for a profit without the seller having resided in them. Many investors also assumed highly leveraged positions in multiple properties relying on a bullish real estate boom.