AFM391 Chapter Notes - Chapter 16: Book Value, Retained Earnings, Underlying
8 Dec 2017
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Afm 391 chapter 16: complex financial instruments. Basic principles for accounting for derivatives: fi and certain non-financial derivatives represent rights and obligations that meet definition of assets/liabilities and should be recognized in fs, fair value is more relevant measure, gains/losses booked through net income. If company intends to take delivery of goods, contract designated as. Expected use and not accounted for as derivatives. Allows holder to acquire or sell underlying instrument at an exercise/strike price within an exercise period. Options: purchasing an option means paying fee/premium for right to do something, writing an option means charging fee/premium and gives holder/purchaser the right. For a call option, where you pay for right to exercise a strike price @ /option: dr. derivatives financial assets/liabilities 400, cr. Cash 400 (for the amount of the option) Option premiums are composed of 2 amounts: (1) intrinsic value, and (2) time value.
