Accounting for electricity derivatives under IAS 39

Author: Teixeira Lopes, Patrícia

Source: Journal of Derivatives & Hedge Funds, Volume 13, Number 3, November 2007 , pp. 233-246(14)

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Abstract:

This paper analyses the impact of accounting rules on the accounting for hedges with energy derivatives in the context of the launch of MIBEL Derivatives Market. Specifically, the key questions of accounting for nonfinancial derivatives raised by IAS 39, following the mandatory adoption of IFRS in Europe, are described. Under certain conditions, IAS 39 allows contracts on commodities to be exempted from its rules. Those conditions are, however, quite strict and require a case-by-case analysis. IAS 39 requires all derivatives to be reported at fair value. Nevertheless, it allows for hedge accounting, provided that certain conditions are met, eliminating undesirable income volatility. Futures contracts pay-off profile is generally the inverse of the underlying item, and so futures tend to be easily qualified for hedge accounting rules of IAS 39, due to the way in which hedge effectiveness is measured. The paper shows that as far as energy producers and users are concerned, when hedges are accomplished with exchange-traded futures, compliance with IAS 39 hedge accounting rules is simple and straightforward.Journal of Derivatives & Hedge Funds (2007) 13, 233-246. doi:10.1057/palgrave.jdhf.1850074

Document Type: Research article

DOI: http://dx.doi.org/10.1057/palgrave.jdhf.1850074

Affiliations: 1: aFaculty of Economics, University of Porto, Rua Dr Roberto Frias s/n, Porto 4200-464, Portugal.ext: 543);, Tel: +351 225571100 (, Email: patricia@fep.up.pt

Publication date: 2007-11-01