The wrong notes (TT Nov05 p30-32)

Under IAS 39 Financial Instruments: Recognition and Measurement there is a disconnect between the accounting and economic reality. A fundamental issue is that derivatives which guarantee a worst case rate but allow some element of participation often fail the strict criteria of hedge accounting.

Problems encountered by treasurers include RPI-linked derivatives, the derivative-on-derivative rule, currency swaps on net investment hedges, the private equity fund and written options.