Do you remember that in CARVE-OUT hedge accounting was mentioned? Now it’s time to clarify hedge accounting.
Hedge accounting is an accounting method in which entries for the ownership of a security and the opposing hedge are treated as the same thing. Take, for example, a company that has a debt in dollars but its revenue is in another currency. This company could apply hedge accounting if its negotiations permit the company to pay the debt in its own currency’s value even though the debt is in dollar. In this way, the company would start to use hedge accounting as its accounting strategy. Hedge accounting is used for companies that want to reduce the volatility of their results or on shareholders’ equity. This volatility, created by the repeated adjustment of a financial instrument’s value, is known as mark to market. Financial instruments are assets or capital that can be traded. Combining the instrument and the hedge as one entry balances out the opposing movements, thus reducing volatility. Accounting for derivative financial instruments under International Accounting Standards is covered by IAS 39, which is an international accounting standard issued by the International Accounting Standards Board.
Generally speaking, a security can be a stock, a bond or another kind of an intangible investment. A stock is a share of a particular company or corporation and a bond is a security that is usually issued by a public company and normally carries a fixed rate of interest and a set date, called maturity. Bonds are a kind of debt investment.
Mark to market is an accounting procedure by which assets are “marked” or recorded in the account books at their acquisition price or book value.
A derivative is a security with a price that is dependent on or derived from one or more underlying assets. Underlying assets are securities on which derivatives are based.
A hedge fund is an investing group, usually in the form of a limited partnership that uses speculative techniques in the hope of obtaining large capital gains.
In financial English, to hedge means to manage risk, such as using a protective or a defense against financial risk.
In layman’s English, to hedge means to verbally evade giving an answer or making a commitment. Traditionally, any White House Press Secretary (always the main spokesperson for the president of the United States) needs to be very good at hedging difficult questions from the press.
The word cliffhanger comes from cliffs. Duh. Cliffs are vertical, or nearly vertical, rocks that have been formed by erosion and weathering. There are lots of famous cliffs, but the first ones that come to my mind are the White Cliffs of Dover, probably because there was a popular World War II song about them that was part of my childhood, and also because they are on the historical English coastline.
When one thinks of cliffhangers, England and its gothic novels always come to mind. Cliffhangers are the kind of story, book or movie that uses suspense either at the end of an episode or a scene. A good example was the way the final episode of Game of Thrones, season 5, was done. Jon Snow was dead. Or was he? Those of us who sweated it out until season 6 was aired were never really sure. The writers used old-fashioned melodrama, suspense and uncertainty, and the audience was left as if hanging from a cliff in a state of tension and apprehension. And that’s a true cliffhanger.
This part of the blog will not be able to offer any nail-biting cliffhangers, but it will have classes in series, and I hope they will be interesting enough that you will want to come back and read what happens next, even if you don’t lose sleep anticipating the next chapter. Enjoy.