CFDs are financial instruments called derivatives where their prices are based on the different prices of underlying assets like indices, shares, commodities and other forms of instruments available in the financial world of CFD trading. Options like stock-shares, futures contracts and forward contracts are considered as derivatives and accounting for them will require the accountant to keep the record of the derivatives at cost as they will need to monitor the price changes within those derivatives to ensure the adjustment of the investment’s value, expenditures and other costs are kept and considered.
Contracts for Difference
Traders are obligated when buying or selling to a trader and will need to pay for the differences between the underlying asset’s present price and the projected price during the time of the contract’s use. When the difference becomes positive, the buyer will need to pay the seller but if the difference resulted to negative, then the seller will have to pay the buyer. For instance,
when a CFD on an index has been purchased when the share is priced at $20 and the index price in the market has risen to $24, the seller will need to pay the buyer the $4 difference. If however, the index price had declined to let’s say $18, the buyer will need to pay the seller the $2.
CFD Accounting
CFDs are tracked initially at purchase cost. For instance, if your business purchased 100 CFDs of an index that was priced around $20, that business’ accountant will then record this investment at $2000 dollars in its books. Such instances of unrealized losses or gains are tracked every end of a time period where the CFDs are not being used. During the time where the CFDs are used, the opening position and closing position’s differences shall be recorded again depending on whether it was a gain or loss based on the position of the company if they are sellers or buyers.
Unrealized Losses and Gains
What are unrealized losses and gains? They are called unrealized due to the transaction’s sources not being complete and losses or gains have not yet been earned. These unrealized losses or gains have an effect on the investment account of the business.
Suppose that your business owned $2,000 of 100 CFDs that was acquired at $20 and the index price was $24 at the end of the month. Because the value of the investment has ascended to $2400, your accountant will record a $400 increase in the unrealized gains and this $400 increase shall reflect on the investment account assigned for your business’s CFDs. When your company starts using these specific CFDs and finally gets losses or gains, its status as an unrealized loss or gain shall be omitted and records shall go as normal from there.
Transaction Costs and Margin Deposits
Transaction costs are simply settled in order for a trader or business to get into transactions with other traders, businesses or brokers These are recorded by the accountant as expenses and most of these are based on certain set percentages
A Margin deposit is basically the collateral that needs to be settled by the business or the trader in order to proceed with the exchanges and such are based on specific percentages of the position.
