Securities and derivatives forecast
Securities and derivatives can create a gap between accounting valuation and cash flow. A forecast should separate purchase, sale, valuation, unrealized movement, derivative settlement, and any hedge-related equity movement.
How do I forecast securities and derivatives?
Start with the investment or trading security purchase. Add sale gains or losses, valuation gains or losses, and interest or dividend receipts separately. For derivatives, separate valuation entries from settlement cash flows.
1) Keep realized and unrealized movement separate
Realized gains and losses can affect PL when a sale or settlement occurs. Unrealized gains and losses may affect PL or equity depending on classification, so the transaction description should explain the assumption.
2) Review derivative settlement timing
Derivative valuation can change before cash settlement. Put the settlement in the expected cash month so ending cash does not drift from the financial instrument assumptions.
3) Confirm classification before external use
Financial instrument classification and hedge accounting are policy-sensitive areas. Use the forecast to organize the movement, then confirm treatment before financial reporting, tax, investor, or lender use.