ASC 815-10
Overall
815 Derivatives and Hedging
Source downloaded: .Record version 57816aad9a5e. Effective date must be checked in the source.
ASC 815-10 is the Overall subtopic of the derivatives and hedging Topic: it defines what a derivative instrument is, sets the scope (including a long list of scope exceptions), and requires that derivatives be recognized as assets or liabilities on the statement of financial position and measured at fair value. A contract is a derivative only if it has (1) one or more underlyings and one or more notional amounts or payment provisions, (2) no or a smaller-than-usual initial net investment, and (3) the ability to be settled net (815-10-15-83). If conditions are met, an entity may elect to designate a derivative as a fair value hedge, cash flow hedge, or hedge of foreign currency exposure (including a net investment in a foreign operation).
Key points (7)
- A derivative instrument must have all three characteristics: (1) one or more underlyings plus one or more notional amounts or payment provisions, (2) no initial net investment or one smaller than for other contracts with a similar response to market factors, and (3) net settlement by contract terms, by a means outside the contract, or through delivery of an asset that leaves the recipient in a position not substantially different from net settlement (815-10-15-83).
- All derivatives, including embedded derivatives separated under 815-15-25-1, must be recognized as assets or liabilities and measured at fair value; hedge designation (fair value hedge, cash flow hedge, or foreign currency/net investment hedge) is elective and only for qualifying items with an expectation of effective offset (815-10-05-4; 815-10-10-1).
- Scope exceptions in 815-10-15-13 remove specified contracts even if the derivative definition is met: regular-way security trades, normal purchases and normal sales, certain insurance contracts and market risk benefits, certain financial guarantees, certain non-exchange-traded contracts, derivatives that impede sales accounting, investments in life insurance, certain investment contracts, certain loan commitments, certain IO/PO strips, certain contracts in an entity's own equity, leases, residual value guarantees, registration payment arrangements, and certain fixed-odds wagering contracts.
- The normal purchases and normal sales exception requires normal terms and quantity, an underlying in any price adjustment that is clearly and closely related to the asset bought or sold, probable physical (not net) settlement at inception and throughout the term, and contemporaneous documentation; failure to document precludes the exception, and once elected it cannot be revoked (815-10-15-22 through 15-51, 15-37 through 15-39).
- Freestanding options attached to debt by a third party or transferable independent of the debt are attached freestanding derivatives, not embedded derivatives, because an embedded derivative refers to provisions in a single contract between the same counterparties (815-10-15-5 through 15-7).
- Two or more legally separate transactions must be viewed as a unit if entered into contemporaneously and in contemplation of one another, with the same counterparty (or through an intermediary), relating to the same risk, and with no substantive business purpose for separate structuring (815-10-15-9).
- Contracts indexed to the reporting entity's own stock and classified in stockholders' equity, share-based payment awards under Topic 718, contracts to enter into a business combination, and physically settled forward purchases of own shares under Topic 480 are not derivatives for the issuer, but the exceptions do not extend to counterparties or to instruments indexed in part to something other than the entity's own stock (815-10-15-74 through 15-75).
For students. This is the gateway analysis for every derivative question: first test the three-part definition in 815-10-15-83, then run the scope exceptions in 815-10-15-13 before considering hedge accounting. Students commonly assume that meeting the derivative definition automatically means fair value accounting through earnings, forgetting the exceptions (e.g., normal purchases and normal sales, own-equity contracts, leases) and that hedge designation is elective, not automatic.
derivative instrument definitionunderlyingnotional amountnet settlementinitial net investmentnormal purchases and normal salesscope exceptionshedge designation
Machine-generated study aid for ASC 815-10. Check the source paragraphs below.
815-10-00Status
Source downloaded: .Record version 194aec6dac79. Effective date must be checked in the source.
815-10-00-1
The following table identifies the changes made to this Subtopic.
815-10-05Overview and Background
Source downloaded: .Record version 9bf781065e68. Effective date must be checked in the source.
815-10-05-1
The Derivatives and Hedging Topic includes the following Subtopics:
- aOverall
- bEmbedded Derivatives
- cHedging—General
- dFair Value Hedges
- eCash Flow Hedges
- fNet Investment Hedges
- gContracts in Entity's Own Equity
- hWeather Derivatives.
815-10-05-2
The first six Subtopics address the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. The last two Subtopics provide guidance on accounting for contracts that have characteristics of derivative instruments but that are not accounted for as derivative instruments under this Subtopic.
815-10-05-3
The guidance in this Subtopic is presented in the following two Subsections:
- aGeneral
- bCertain Contracts on Debt and Equity Securities.
815-10-05-4
This Topic requires that an entity recognize derivative instruments, including certain derivative instruments embedded in other contracts, as assets or liabilities in the statement of financial position and measure them at fair value. If certain conditions are met, an entity may elect, under this Topic, to designate a derivative instrument in any one of the following ways:
- aA hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that are attributable to a particular risk (referred to as a fair value hedge)
- bA hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk (referred to as a cash flow hedge)
- cA hedge of the foreign currency exposure of any one of the following:
- 1An unrecognized firm commitment (a foreign currency fair value hedge)
- 2An available-for-sale debt security (a foreign currency fair value hedge)
- 3A forecasted transaction (a foreign currency cash flow hedge)
- 4A net investment in a foreign operation.
- 1
815-10-05-5
An unrecognized firm commitment can be viewed as an executory contract that represents both a right and an obligation. If a previously unrecognized firm commitment that is designated as a hedged item is accounted for in accordance with this Topic, an asset or a liability is recognized and reported in the statement of financial position related to the recognition of the gain or loss on the firm commitment. Consequently, subsequent references to an asset or a liability in this Topic include a firm commitment.
815-10-05-6
This Topic generally provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of either of the following:
- aThe changes in the fair value of the hedged asset or liability that are attributable to the hedged risk
- bThe earnings effect of the hedged forecasted transaction.
815-10-05-7
This Subtopic defines derivative instrument, addresses the pervasive scope of this Topic, and specifies the primary accounting for derivative instruments within this Topic's scope.
Synthetic Guaranteed Investment Contracts
815-10-05-8
The following is a background discussion of synthetic guaranteed investment contracts, including a comparison with traditional and benefit-response guaranteed investment contracts. Paragraph 815-10-55-63 states that, from the perspective of the issuer of the contract, synthetic guaranteed investment contracts are derivative instruments within the scope of this Subtopic.
815-10-05-9
In a traditional guaranteed investment contract, the issuer of the contract takes deposits from a benefit plan or other institutional customer and purchases investments that are held in its general account. (Equity investments may also be acquired, although they are less common than fixed income investments.) The customer is a creditor of the issuing entity and therefore has credit risk, although generally the guaranteed investment contract issuers have a high credit-quality rating. The issuer is contractually obligated to repay the principal and specified interest guaranteed to the customer. The plan's provisions typically permit the participant to withdraw funds from the fund at book value (also referred to as account or contract value) for specified reasons, such as loans, hardship withdrawals, and transfers to other investment options offered by the plan.
815-10-05-10
A benefit-responsive guaranteed investment contract contains provisions that mirror the plan's participant-directed withdrawal or transfer provisions. Therefore, the issuer is at risk that interest rates could increase, reducing the price of the fixed-income investments backing the guaranteed investment contract liability, while those investments may have to be sold at a loss to cover withdrawals.
815-10-05-11
A synthetic guaranteed investment contract is a contract that simulates the performance of a traditional guaranteed investment contract through the use of financial instruments. As with other types of guaranteed investment contracts, the specific terms and conditions of synthetic guaranteed investment contracts are negotiated on a case-by-case basis. However, those contracts fall into several broad structural categories, as follows:
- aBuy-and-hold. Typically, a buy-and-hold synthetic contract covers a limited class of assets, usually high-quality bonds expected to be held to maturity. There is no stated rate guarantee; instead, the interest rate is reset periodically as specified in the contract, subject to a specified floor—for example, 3 percent or 0 percent. The term of the contract generally is consistent with the maturity of the underlying assets. Although buy-and-hold contracts are structured to permit participant withdrawals and transfers at book value, generally no withdrawals are expected. The arrangements between the benefit plan or other institutional investor and the wrap provider typically contain provisions outlining operating and investing guidelines for the customer. These guidelines are designed to ensure the availability of other sources of liquidity sufficient to satisfy expected levels of net participant-directed withdrawals and transfers, without the need to access the assets wrapped by the synthetic guaranteed investment contract. While participants can make withdrawals or transfers at book value, in most cases, the customer can terminate the contract at the value of the assets at any time, but it can withdraw at contract value only at maturity or earlier with a specified notification period.
- bActively managed. With an actively managed synthetic guaranteed investment contract, the assets often are managed by an outside investment manager, but may be managed by the insurer. Generally, the contract is evergreen—that is, there is no specified maturity date—and there is no stated rate guarantee; instead, the interest rate is reset periodically as specified in the contract, subject to a specified floor, frequently zero percent and typically not less than zero percent. Participant-directed withdrawals and transfers are made at book value, with future interest returns adjusted to recognize the difference between the fair value and book value of the remaining assets covered by the synthetic guaranteed investment contract, but typically not below a zero interest rate. Customer-initiated withdrawal provisions are similar to those for buy-and-hold guaranteed investment contracts.
- cFixed-rate, fixed-maturity. This contract is essentially the same as a traditional general account guaranteed investment contract. The synthetic guaranteed investment contract issuer guarantees a fixed rate for a fixed and certain term and assumes the investment risks and rewards of the assets. If the assets earn less than the guaranteed return, the insurance entity absorbs the loss. If the assets earn more than was assumed in pricing, the income recognized by the insurer will be greater than the wrap fee assumed in the pricing. Typically, the insurer also will be the investment manager because of the assumption of investment risk. Note that participant-initiated withdrawals and transfers of fixed-rate, fixed-maturity contracts are permitted at book value but are expected to occur infrequently. Withdrawals initiated by the customer generally are permitted only at the value of the assets and the guarantee is not activated.
815-10-05-12
A key difference between a synthetic guaranteed investment contract and a traditional guaranteed investment contract is that the policyholder (such as a benefit plan or other institutional customer) owns the assets underlying the synthetic guaranteed investment contract. (With a traditional guaranteed investment contract, the policyholder owns only the contract itself that provides the plan with a call on the contract issuer's assets in the event of default.) Those assets may be held in a trust owned by the policyholder and typically consist of government securities, private and public mortgage-backed securities, and other asset-backed securities, and investment grade corporate obligations. To enable the policyholder to realize a specific known value for the assets if it needs to liquidate them, synthetic guaranteed investment contract utilize a wrapper contract that provides market and cash flow risk protection to the policyholder. This wrapper or guarantee may be provided in a variety of structures. In one structure, the issuer provides cash advances to fund the policyholder's cash withdrawal requirements if the invested asset values have decreased.
815-10-05-13
Other structures include:
- aA swap agreement whereby the synthetic guaranteed investment contract issuer exchanges a fixed return for the value of supporting assets, if needed for benefit payments
- bAn agreement by the issuer to buy assets at book value if a sale is needed to make benefit payments
- cA payment upon termination of the contract equal to the difference between a hypothetical book value of plan assets and their value. (Provisions of benefit-responsive traditional guaranteed investment contracts and synthetic guaranteed investment contracts generally prohibit the benefit plan and its sponsor from taking any actions that would encourage participant withdrawals and transfers.)
815-10-05-14
Synthetic guaranteed investment contracts can be viewed as the issuer selling a put option to the policyholder. For many synthetic guaranteed investment contracts, the option premium is in the form of a fee charged on the outstanding contract book value. For some forms of synthetic guaranteed investment contracts, the option premium for the put option is not explicitly stated but, instead, is embedded in the determination of the investment return guaranteed to the policyholder.
815-10-05-15
In any of the structures, various methods can be used to limit the synthetic guaranteed investment contract issuer's exposure to net payments under the contract. In the current marketplace, most synthetic guaranteed investment contracts pass many of the asset- and cash-flow-related risks to the policyholder. Structures to limit such risk include the following:
- aReset of the crediting rate or maturity date. Cash flow volatility (for example, timing of benefit payments) as well as asset underperformance can be passed through to the policyholder through adjustments to future contract crediting rates and/or contract maturities. Formulas are typically provided in the contract that adjust renewal crediting rates to recognize the difference between the fair value and book value of remaining assets in the segregated portfolio.
- bExclusion of impaired securities. Impaired securities may also be excluded directly from book value guarantees.
- cInvestment guidelines. Carefully structured investment policy can limit significantly the cash volatility of assets in the segregated portfolio (for example, limit callable securities, mortgage backed securities, and so forth).
- dBuffer funds. Cash and cash equivalents are maintained and are accessed first to fund benefit payments and thus limit the potential for synthetic guaranteed investment contract issuer's assets to be accessed to make benefit payments.
- eLiquidation structure of pension plan. Pro rata or tiered structures dictate the order of accessing various plan assets, including synthetic guaranteed investment contract assets, for benefit payments.
Certain Contracts on Debt and Equity Securities
815-10-05-16
The Certain Contracts on Debt and Equity Securities Subsections provide guidance on certain contracts on debt and equity securities.
815-10-10Objectives
Source downloaded: .Record version cc10d5e06426. Effective date must be checked in the source.
815-10-10-1
Four fundamental decisions serve as cornerstones underlying the guidance in this Topic:
- aDerivative instruments represent rights or obligations that meet the definitions of assets or liabilities and should be reported in financial statements.
- bFair value is the most relevant measure for financial instruments and the only relevant measure for derivative instruments. Derivative instruments should be measured at fair value, and adjustments to the carrying amount of hedged items should reflect changes in their fair value (that is, gains or losses) that are attributable to the risk being hedged and that arise while the hedge is in effect.
- cOnly items that are assets or liabilities should be reported as such in financial statements.
- dSpecial accounting for items designated as being hedged should be provided only for qualifying items. One aspect of qualification should be an assessment of the expectation of effective offsetting changes in fair values or cash flows during the term of the hedge for the risk being hedged.
815-10-15Scope and Scope Exceptions
Source downloaded: .Record version 107216572228. Effective date must be checked in the source.
Entities
815-10-15-1
This Subtopic applies to all entities. Some entities, such as not-for-profit entities (NFPs) and defined benefit pension plans, do not report earnings as a separate caption in a statement of financial performance. The application of this Subtopic to those entities is set forth in paragraphs 815-10-35-3, 815-20-15-1, 815-25-35-19, and 815-30-15-3.
Instruments
815-10-15-2
The scope of this Subtopic relates primarily to whether a contract meets the definition of a derivative instrument (see paragraph 815-10-15-83). However, as discussed in this Subsection, some contracts that meet the definition of derivative instrument are not within the scope of this Subtopic, while other contracts that do not meet the definition of derivative instrument are within the scope of this Subtopic. Some of the disclosure requirements in Section 815-10-50 apply to nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66.
815-10-15-3
If events occur after the inception or acquisition of a contract that cause the contract to meet the definition of a derivative instrument, then that contract shall be accounted for at that later date as a derivative instrument under this Subtopic unless one of the scope exceptions in this Subsection applies.
815-10-15-4
If a contract meets the definition of both a derivative instrument and a firm commitment under this Subtopic, then an entity shall account for the contract as a derivative instrument unless one of the scope exceptions in this Subsection applies.
815-10-15-4A
This Section addresses the following unit of accounting questions on scope:
- aViewing a contract as freestanding or embedded. Whether a feature should be viewed as freestanding or embedded in determining the scope application of this Subtopic and Subtopic 815-15 is addressed beginning in paragraph 815-10-15-5.
- bViewing two or more contracts as a unit in applying the scope of this Subtopic. Whether two or more legally separate transactions should be viewed as a unit in determining the scope application of this Subtopic is addressed beginning in paragraph 815-10-15-8.
815-10-15-4B
Paragraph 815-10-25-5A explains that Section 815-10-25 addresses the following unit of accounting questions with respect to recognition:
- aViewing two freestanding derivative instruments as a unit. Whether two or more contracts that are derivative instruments within the scope application of this Subtopic should be viewed as a unit for recognition and other purposes—including for hedge accounting purposes—is addressed beginning in paragraph 815-10-25-6.
- bViewing combinations of options as separate options or as a single forward contract. Whether combinations of options that individually are within the scope application of this Subtopic or Subtopic 815-15 should be viewed as separate options or as a single forward is addressed beginning in paragraph 815-10-25-7.
815-10-15-5
The notion of an embedded derivative, as discussed in paragraph 815-15-25-1, does not contemplate features that may be sold or traded separately from the contract in which those rights and obligations are embedded. Assuming they meet this Subtopic's definition of a derivative instrument, such features shall be considered attached freestanding derivative instruments rather than embedded derivatives by both the writer and the current holder.
815-10-15-6
A put or call option that is added or attached to a debt instrument by a third party contemporaneously with or after the issuance of the debt instrument shall be separately accounted for as a derivative instrument under this Subtopic by the investor (that is, by the creditor). An option that is added or attached to an existing debt instrument by another party results in the investor having different counterparties for the option and the debt instrument and, thus, the option shall not be considered an embedded derivative. Paragraph 815-15-25-2 states that notion of an embedded derivative in a hybrid instrument refers to provisions incorporated into a single contract, and not to provisions in separate contracts between different counterparties.
815-10-15-7
If a debt instrument includes in its terms at issuance an option feature that is explicitly transferable independent of the debt instrument and thus is potentially exercisable by a party other than either the issuer of the debt instrument (the debtor) or the holder of the debt instrument (the investor), that option shall be considered under this Subtopic as an attached freestanding derivative instrument, rather than an embedded derivative, by both the writer and the holder of the option.
815-10-15-8
In some circumstances, an entity could enter into two or more legally separate transactions that, if combined, would generate a result that is economically similar to entering into a single transaction that would be accounted for as a derivative instrument under this Subtopic. For guidance on circumstances in which two or more contracts that have been determined to be derivative instruments within the scope of this Subtopic must be viewed as a unit, see the guidance beginning in paragraph 815-10-25-6. For guidance on circumstances in which two or more contracts that have been determined to be options within the scope of this Subtopic must be viewed in combination, see the guidance beginning in paragraph 815-10-25-7.
815-10-15-9
If two or more separate transactions may have been entered into in an attempt to circumvent the provisions of this Subtopic, the following indicators shall be considered in the aggregate and, if present, shall cause the transactions to be viewed as a unit and not separately:
- aThe transactions were entered into contemporaneously and in contemplation of one another.
- bThe transactions were executed with the same counterparty (or structured through an intermediary).
- cThe transactions relate to the same risk.
- dThere is no apparent economic need or substantive business purpose for structuring the transactions separately that could not also have been accomplished in a single transaction.
815-10-15-10
The guidance in the General Subsections of this Subtopic applies to all derivative instruments, as that term is defined in paragraph 815-10-15-83, unless explicitly excluded by this Subsection (see paragraphs and ). The General Subsections of this Subtopic also identify incremental guidance that applies specifically to forward commitment dollar rolls.
The guidance in the General Subsections of this Subtopic applies to all derivative instruments, as that term is defined in paragraph 815-10-15-83, unless explicitly excluded by this Subsection (see paragraphs ). The General Subsections of this Subtopic also identify incremental guidance that applies specifically to forward commitment dollar rolls.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8| Editor's Note: The content of paragraph 815-10-15-10 will change upon transition, together with a change in the heading noted below. |
| •> Instruments within Scope |
815-10-15-11
The holder of an interest in securitized financial assets (other than those identified in paragraphs ) shall determine whether the interest is a freestanding derivative instrument or contains an embedded derivative that under Section 815-15-25 would be required to be separated from the host contract and accounted for separately.
815-10-15-12
A forward commitment dollar roll that does not meet the definition of a derivative instrument is within the scope of the guidance specified for such contracts in this Subtopic (see paragraphs 815-10-25-15, 815-10-30-4, and 815-10-35-4).
815-10-15-13
Notwithstanding the conditions in paragraphs , the following contracts are not subject to the requirements of this Subtopic if specified criteria are met:
- aRegular-way security trades
- bNormal purchases and normal sales
- cCertain insurance contracts and market risk benefits
- dCertain financial guarantee contracts
- eCertain contracts that are not traded on an exchange
- fDerivative instruments that impede sales accounting
- gInvestments in life insurance
- hCertain investment contracts
- iCertain loan commitments
- jCertain interest-only strips and principal-only strips
- kCertain contracts involving an entity's own equity
- lLeases
- mResidual value guarantees
- n
- oCertain fixed-odds wagering contracts.
815-10-15-14
The following are the criteria that must be met for each scope exception.
815-10-15-15
Regular-way security trades are defined as contracts that provide for delivery of a security within the period of time (after the trade date) generally established by regulations or conventions in the marketplace or exchange in which the transaction is being executed. For example, a contract to purchase or sell a publicly traded equity security in the United States customarily requires settlement within three business days. If a contract for purchase of that type of security requires settlement in three business days, the regular-way security trades scope exception applies, but if the contract requires settlement in five days, the regular-way security trades scope exception does not apply unless the reporting entity is required to account for the contract on a trade-date basis.
815-10-15-16
Except as provided in (a) in the following paragraph, a contract for an existing security does not qualify for the regular-way security trades scope exception if either of the following is true:
- aIt requires or permits net settlement (as discussed in paragraphs ).
- bA market mechanism exists to facilitate net settlement of that contract (as discussed in paragraphs ).
815-10-15-17
The scope exception for regular-way security trades applies only to a contract that requires delivery of securities that are readily convertible to cash except that the scope exception also shall or may apply in any of the following circumstances:
- aIf an entity is required, or has a continuing policy, to account for a contract to purchase or sell an existing security on a trade-date basis, rather than a settlement-date basis, and thus recognizes the acquisition (or disposition) of the security at the inception of the contract, then the entity shall apply the regular-way security trades scope exception to that contract.
- bIf an entity is required, or has a continuing policy, to account for a contract for the purchase or sale of when-issued securities or other securities that do not yet exist on a trade-date basis, rather than a settlement-date basis, and thus recognizes the acquisition or disposition of the securities at the inception of the contract, that entity shall apply the regular-way security trades scope exception to those contracts.
- cContracts for the purchase or sale of when-issued securities or other securities that do not yet exist, except for those contracts accounted for on a trade-date basis, are excluded from the requirements of this Subtopic as a regular-way security trade only if all of the following are true:
- 1There is no other way to purchase or sell that security.
- 2Delivery of that security and settlement will occur within the shortest period possible for that type of security.
- 3It is probable at inception and throughout the term of the individual contract that the contract will not settle net and will result in physical delivery of a security when it is issued. (The entity shall document the basis for concluding that it is probable that the contract will not settle net and will result in physical delivery.)
- 1
815-10-15-18
Note that contracts that require delivery of securities that are not readily convertible to cash (and thus do not permit net settlement) are not subject to the requirements of this Subtopic unless there is a market mechanism outside the contract to facilitate net settlement (as described in paragraph 815-10-15-110).
815-10-15-19
A contract for the purchase or sale of when-issued securities or other securities that do not yet exist is eligible to qualify for the regular-way security trades scope exception (as discussed in paragraph 815-10-15-17) even though either of the following is true:
- aThat contract permits net settlement (as discussed in paragraphs ).
- bA market mechanism exists to facilitate net settlement of that contract (as discussed in paragraphs ).
815-10-15-20
Net settlement (as described in paragraphs 815-10-15-100 and 815-10-15-110) of contracts in a group of contracts similarly designated as regular-way security trades would call into question the continued application of the scope exception to such contracts.
815-10-15-21
This Subtopic does not change whether an entity recognizes regular-way security trades on the trade date or the settlement date.
815-10-15-22
Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold by the reporting entity over a reasonable period in the normal course of business.
815-10-15-23
The assessment of whether a contract qualifies for the normal purchases and normal sales scope exception (including whether the underlying of a price adjustment within the contract is not clearly and closely related to the asset being sold or purchased) shall be performed only at the inception of the contract.
815-10-15-24
The normal purchases and normal sales scope exception sometimes will result in different parties to a contract reaching different conclusions about whether the contract is required to be accounted for as a derivative instrument. For example, the contract may be for ordinary sales by one party but not for ordinary purchases by the counterparty.
815-10-15-25
Following are discussions of four important elements needed to qualify for the normal purchases and normal sales scope exception:
- aNormal terms (including normal quantity)
- bClearly and closely related underlying
- cProbable physical settlement
- dDocumentation.
815-10-15-26
Also discussed is guidance that should be considered in determining whether each of the following specific types of contracts qualifies for the normal purchases and normal sales scope exception:
- aFreestanding option contracts
- bForward (non-option-based) contracts
- cForward contracts that contain optionality features
- dPower purchase or sale agreements.
815-10-15-27
To qualify for the scope exception, a contract's terms must be consistent with the terms of an entity's normal purchases or normal sales, that is, the quantity purchased or sold must be reasonable in relation to the entity's business needs. Determining whether or not the terms are consistent requires judgment.
815-10-15-28
In making those judgments, an entity should consider all relevant factors, including all of the following:
- aThe quantities provided under the contract and the entity's need for the related assets
- bThe locations to which delivery of the items will be made
- cThe period of time between entering into the contract and delivery
- dThe entity's prior practices with regard to such contracts.
815-10-15-29
Further, each of the following types of evidence should help in identifying contracts that qualify as normal purchases or normal sales:
- aPast trends
- bExpected future demand
- cOther contracts for delivery of similar items
- dAn entity's and industry's customs for acquiring and storing the related commodities
- eAn entity's operating locations.
815-10-15-30
Contracts that have a price based on an underlying that is not clearly and closely related to the asset being sold or purchased (such as a price in a contract for the sale of a grain commodity based in part on changes in the Standard and Poor's index) or that are denominated in a foreign currency that meets none of the criteria in paragraph 815-15-15-10(b) shall not be considered normal purchases and normal sales.
815-10-15-31
The phrase not clearly and closely related in the preceding paragraph with respect to the normal purchases and normal sales scope exception is used to convey a different meaning than in paragraphs 815-15-25-1(a) and with respect to the relationship between an embedded derivative and the host contract in which it is embedded. The guidance in this discussion of normal purchases and normal sales does not affect the use of the phrase not clearly and closely related in paragraphs other than the preceding paragraph. For purposes of determining whether a contract qualifies for the normal purchases and normal sales scope exception, the application of the phrase not clearly and closely related to the asset being sold or purchased shall involve an analysis of both qualitative and quantitative considerations. The analysis is specific to the contract being considered for the normal purchases and normal sales scope exception and may include identification of the components of the asset being sold or purchased.
815-10-15-32
The underlying in a price adjustment incorporated into a contract that otherwise satisfies the requirements for the normal purchases and normal sales scope exception shall be considered to be not clearly and closely related to the asset being sold or purchased in any of the following circumstances:
- aThe underlying is extraneous (that is, irrelevant and not pertinent) to both the changes in the cost and the changes in the fair value of the asset being sold or purchased, including being extraneous to an ingredient or direct factor in the customary or specific production of that asset.
- bIf the underlying is not extraneous as discussed in (a), the magnitude and direction of the impact of the price adjustment are not consistent with the relevancy of the underlying. That is, the magnitude of the price adjustment based on the underlying is significantly disproportionate to the impact of the underlying on the fair value or cost of the asset being purchased or sold (or of an ingredient or direct factor, as appropriate).
- cThe underlying is a currency exchange rate involving a foreign currency that meets none of the criteria in paragraph 815-15-15-10(b) for that reporting entity.
815-10-15-33
For example, in the case in which the price adjustment focuses on the changes in the fair value of the asset being purchased or sold, if the terms of the price adjustment are expected, at the inception of the contract, to affect the purchase or sales price in a manner comparable to the outcome that would be obtained if, at each delivery date, the parties were to reprice the contract amount under the then-existing conditions for the asset being delivered on that date, the price adjustment's underlying is considered to be clearly and closely related to the asset being sold or purchased and the price adjustment would not be an impediment to the contract qualifying for the normal purchases and normal sales scope exception.
815-10-15-34
If the underlying in a price adjustment incorporated into a purchase or sales contract is not an impediment to qualifying for the normal purchases and normal sales scope exception because it is considered to be clearly and closely related to the asset being sold or purchased, the contract must meet the other requirements in this Subsection to qualify for the normal purchases and normal sales scope exception.
815-10-15-35
For a contract that meets the net settlement provisions of paragraphs and the market mechanism provisions of paragraphs to qualify for the normal purchases and normal sales scope exception, it must be probable at inception and throughout the term of the individual contract that the contract will not settle net and will result in physical delivery.
815-10-15-36
The normal purchases and normal sales scope exception only relates to a contract that results in gross delivery of the commodity under that contract. The normal purchases and normal sales scope exception shall not be applied to a contract that requires cash settlements of gains or losses or otherwise settle gains or losses periodically because those settlements are net settlements. Paragraph 815-20-25-22 explains how an entity may designate such a contract as a hedged item in an all-in-one hedge if all related criteria are met.
815-10-15-36A
Certain contracts for the purchase or sale of electricity on a forward basis that necessitate transmission through, or delivery to a location within, an electricity grid operated by an independent system operator result in one of the contracting parties incurring charges (or credits) for the transmission of that electricity based in part on locational marginal pricing differences payable to (or receivable from) the independent system operator. For example, this is the case when the delivery location under the contract (for example, a hub location) is not the same location as the point of ultimate consumption of the electricity or the point from which the electricity exits the electricity grid for transmission to a customer load zone. Delivery to the point of ultimate consumption or the exit point is facilitated by the independent system operator of the grid. The purchase or sale contract and the transmission services do not constitute a series of sequential contracts intended to accomplish the ultimate acquisition or sale of a commodity as discussed in paragraph 815-10-15-41, and the use of locational marginal pricing to determine the transmission charge (or credit) does not constitute net settlement, even in situations in which legal title to the associated electricity is conveyed to the independent system operator during transmission.
815-10-15-37
For contracts that qualify for the normal purchases and normal sales exception under any provision of paragraphs , the entity shall document the designation of the contract as a normal purchase or normal sale, including either of the following:
- aFor contracts that qualify for the normal purchases and normal sales exception under paragraph 815-10-15-41 or , the entity shall document the basis for concluding that it is probable that the contract will not settle net and will result in physical delivery.
- bFor contracts that qualify for the normal purchases and normal sales exception under paragraphs , the entity shall document the basis for concluding that the agreement meets the criteria in that paragraph, including the basis for concluding that the agreement is a capacity contract.
815-10-15-38
The documentation requirements can be applied either to groups of similarly designated contracts or to each individual contract. Failure to comply with the documentation requirements precludes application of the normal purchases and normal sales scope exception to contracts that would otherwise qualify for that scope exception.
815-10-15-39
The normal purchases and normal sales scope exception could effectively be interpreted as an election in all cases. However, once an entity documents compliance with the requirements of paragraphs , which could be done at the inception of the contract or at a later date, the entity is not permitted at a later date to change its election and treat the contract as a derivative instrument.
815-10-15-40
Option contracts that would require delivery of the related asset at an established price under the contract only if exercised are not eligible to qualify for the normal purchases and normal sales scope exception, except as indicated in paragraphs .
815-10-15-41
Forward contracts are eligible to qualify for the normal purchases and normal sales scope exception. However, forward contracts that contain net settlement provisions as described in either paragraphs or are not eligible for the normal purchases and normal sales scope exception unless it is probable at inception and throughout the term of the individual contract that the contract will not settle net and will result in physical delivery. Contracts that are subject to unplanned netting (referred to as a book-out in the electric utility industry) do not qualify for this scope exception except as specified in paragraph 815-10-15-46. Net settlement (as described in paragraphs and ) of contracts in a group of contracts similarly designated as normal purchases and normal sales would call into question the classification of all such contracts as normal purchases or normal sales. Contracts that require cash settlements of gains or losses or are otherwise settled net on a periodic basis, including individual contracts that are part of a series of sequential contracts intended to accomplish ultimate acquisition or sale of a commodity, do not qualify for the normal purchases and normal sales scope exception.
815-10-15-42
Forward contracts that contain optionality features that do not modify the quantity of the asset to be delivered under the contract are eligible to qualify for the normal purchases and normal sales scope exception. Except for power purchase or sales agreements addressed in paragraphs , if an option component permits modification of the quantity of the assets to be delivered, the contract is not eligible for the normal purchases and normal sales scope exception, unless the option component permits the holder only to purchase or sell additional quantities at the market price at the date of delivery. For forward contracts that contain optionality features to qualify for the normal purchases and normal sales scope exception, the criteria discussed in the preceding paragraph must be met.
815-10-15-43
If the optionality feature in the forward contract can modify the quantity of the asset to be delivered under the contract and that option feature has expired or has been completely exercised (even if delivery has not yet occurred), there is no longer any uncertainty as to the quantity to be delivered under the forward contract. Accordingly, following such expiration or exercise, the forward contract would be eligible for designation as a normal purchase or normal sale, provided that the other applicable conditions in this Subsection are met. Example 10 (see paragraph 815-10-55-121) illustrates this guidance.
815-10-15-44
The inclusion of a purchased option that would, if exercised, require delivery of the related asset at an established price under the contract within a single contract that meets the definition of a derivative instrument disqualifies the entire contract from being eligible to qualify for the normal purchases and normal sales scope exception in this Subsection except as provided in the following paragraph through paragraph 815-10-15-51 with respect to certain power purchase or sales agreements.
815-10-15-45
Notwithstanding the criteria in paragraphs , a power purchase or sales agreement (whether a forward contract, option contract, or a combination of both) that is a capacity contract for the purchase or sale of electricity also qualifies for the normal purchases and normal sales scope exception if all of the following applicable criteria are met:
- aFor both parties to the contract, both of the following criteria are met:
- 1The terms of the contract require physical delivery of electricity. That is, the contract does not permit net settlement, as described in paragraphs . For an option contract, physical delivery is required if the option contract is exercised. Certain contracts for the purchase or sale of electricity on a forward basis that necessitate transmission through, or delivery to a location within, an electricity grid operated by an independent system operator result in one of the contracting parties incurring charges (or credits) for the transmission of that electricity based in part on locational marginal pricing differences payable to (or receivable from) the independent system operator. For example, this is the case when the delivery location under the contract (for example, a hub location) is not the same location as the point of ultimate consumption of the electricity or the point from which the electricity exits the electricity grid for transmission to a customer load zone. Delivery to the point of ultimate consumption or the exit point is facilitated by the independent system operator of the grid. The use of locational marginal pricing to determine the transmission charge (or credit) does not constitute net settlement, even in situations in which legal title to the associated electricity is conveyed to the independent system operator during transmission.
- 2The power purchase or sales agreement is a capacity contract. Differentiating between a capacity contract and a traditional option contract (that is, a financial option on electricity) is a matter of judgment that depends on the facts and circumstances. For power purchase or sale agreements that contain option features, the characteristics of an option contract that is a capacity contract and a traditional option contract, which are set forth in paragraph 815-10-55-31 shall be considered in that evaluation; however, other characteristics not listed in that paragraph may also be relevant to that evaluation.
- 1
- bFor the seller of electricity: The electricity that would be deliverable under the contract involves quantities that are expected to be sold by the reporting entity in the normal course of business.
- cFor the buyer of electricity, all of the following criteria are met:
- 1The electricity that would be deliverable under the contract involves quantities that are expected to be used or sold by the reporting entity in the normal course of business.
- 2The buyer of the electricity under the power purchase or sales agreement is an entity that meets both of the following criteria:
- iThe entity is engaged in selling electricity to retail or wholesale customers.
- iiThe entity is statutorily or otherwise contractually obligated to maintain sufficient capacity to meet electricity needs of its customer base.
- i
- 3The contracts are entered into to meet the buyer's obligation to maintain a sufficient capacity, including a reasonable reserve margin established by or based on a regulatory commission, local standards, regional reliability councils, or regional transmission organizations.
- 1
815-10-15-46
Power purchase or sales agreements that meet only the applicable criteria in paragraph 815-10-15-45 qualify for the normal purchases and normal sales scope exception even if they are subject to being booked out or are scheduled to be booked out.
815-10-15-47
Forward contracts for the purchase or sale of electricity that do not meet those applicable criteria as well as other forward contracts are nevertheless eligible to qualify for the normal purchases and normal sales scope exception by meeting the criteria in this Subsection (other than paragraph 815-10-15-45), unless those contracts are subject to unplanned netting (that is, subject to possibly being booked out).
815-10-15-48
Because electricity cannot be readily stored in significant quantities and the entity engaged in selling electricity is obligated to maintain sufficient capacity to meet the electricity needs of its customer base, an option contract for the purchase of electricity that meets the criteria in paragraph 815-10-15-45 qualifies for the normal purchases and normal sales scope exception in that paragraph.
815-10-15-49
This guidance does not affect the accounting for requirements contracts that would not be required to be accounted for under the guidance in this Subtopic pursuant to paragraphs .
815-10-15-50
Contracts that qualify for the normal purchases and normal sales scope exception based on this guidance do not require compliance with any additional guidance in paragraphs . However, contracts that have a price based on an underlying that is not clearly and closely related to the electricity being sold or purchased or that are denominated in a foreign currency that meets none of the criteria in paragraph 815-15-15-10(b) shall not be considered normal purchases and normal sales.
815-10-15-51
This guidance shall not be applied by analogy to the accounting for other types of contracts not meeting the stated criteria.
815-10-15-52
A contract is not subject to the requirements of this Subtopic if it entitles the holder to be compensated only if, as a result of an identifiable insurable event (other than a change in price), the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk. Only those contracts for which payment of a claim is triggered only by a bona fide insurable exposure (that is, contracts comprising either solely insurance or both an insurance component and a derivative instrument) may qualify for this scope exception. To qualify, the contract must provide for a legitimate transfer of risk, not simply constitute a deposit or form of self-insurance.
815-10-15-53
The following types of contracts written by insurance entities or held by the insureds are not subject to the requirements of this Subtopic for the reasons given:
- aTraditional life insurance contracts. The payment of death benefits is the result of an identifiable insurable event (death of the insured) instead of changes in a variable.
- bTraditional property and casualty contracts. The payment of benefits is the result of an identifiable insurable event (for example, theft or fire) instead of changes in a variable.
815-10-15-54
In addition, some contracts with insurance or other entities combine derivative instruments with other insurance products or nonderivative contracts, for example, indexed annuity contracts, variable life insurance contracts, and property and casualty contracts that combine traditional coverages with foreign currency options. Contracts that consist of both derivative portions and nonderivative portions are addressed in paragraph 815-15-25-1. However, insurance entities enter into other types of contracts that may be subject to the provisions of this Subtopic.
815-10-15-55
A property and casualty contract that provides for the payment of benefits or claims as a result of both an identifiable insurable event and changes in a variable would in its entirety not be subject to the requirements of this Subtopic (and thus not contain an embedded derivative that is required to be separately accounted for as a derivative instrument) provided all of the following conditions are met:
- aBenefits or claims are paid only if an identifiable insurable event occurs (for example, theft or fire).
- bThe amount of the payment is limited to the amount of the policyholder's incurred insured loss.
- cThe contract does not involve essentially assured amounts of cash flows (regardless of the timing of those cash flows) based on insurable events highly probable of occurrence because the insured would nearly always receive the benefits (or suffer the detriment) of changes in the variable.
815-10-15-56
If there is an actuarially determined minimum amount of expected claim payments that are the result of insurable events that are highly probable of occurring under the contract, that portion of the contract does not qualify for the insurance scope exception if both of the following conditions are met:
- aThose minimum payment cash flows are indexed to or altered by changes in a variable.
- bThose minimum payment amounts are expected to be paid each policy year (or on another predictable basis).
815-10-15-57
If an insurance contract has an actuarially determined minimum amount of expected claim payments that are highly probable of occurring, then effectively the amount of those claims is the contract's minimum notional amount in determining the embedded derivative under Section 815-15-25.
815-10-15-58
Financial guarantee contracts are not subject to this Subtopic only if they meet all of the following conditions:
- aThey provide for payments to be made solely to reimburse the guaranteed party for failure of the debtor to satisfy its required payment obligations under a nonderivative contract, either:
- 1At prespecified payment dates
- 2At accelerated payment dates as a result of either the occurrence of an event of default (as defined in the financial obligation covered by the guarantee contract) or notice of acceleration being made to the debtor by the creditor.
- 1
- bPayment under the financial guarantee contract is made only if the debtor's obligation to make payments as a result of conditions as described in (a) is past due.
- cThe guaranteed party is, as a precondition in the contract (or in the back-to-back arrangement, if applicable) for receiving payment of any claim under the guarantee, exposed to the risk of nonpayment both at inception of the financial guarantee contract and throughout its term either through direct legal ownership of the guaranteed obligation or through a back-to-back arrangement with another party that is required by the back-to-back arrangement to maintain direct ownership of the guaranteed obligation.
815-10-15-59
Contracts that are not exchange-traded are not subject to the requirements of this Subtopic if the underlying on which the settlement is based is any one of the following:
- aA climatic or geological variable or other physical variable. Climatic, geological, and other physical variables include things like the number of inches of rainfall or snow in a particular area and the severity of an earthquake as measured by the Richter scale. (See Example 13 [paragraph 815-10-55-135].)
- bThe price or value of a nonfinancial asset of one of the parties to the contract provided that the asset is not readily convertible to cash. This scope exception applies only if both of the following are true:
- 1The nonfinancial assets are unique.
- 2The nonfinancial asset related to the underlying is owned by the party that would not benefit under the contract from an increase in the fair value of the nonfinancial asset. (If the contract is a call option, the scope exception applies only if that nonfinancial asset is owned by the party that would not benefit under the contract from an increase in the fair value of the nonfinancial asset above the option's strike price.)
- 1
- cThe fair value of a nonfinancial liability of one of the parties to the contract provided that the liability does not require delivery of an asset that is readily convertible to cash.
- dSpecified volumes of sales or service revenues of one of the parties to the contract. (This scope exception applies to contracts with settlements based on the volume of items sold or services rendered, for example, royalty agreements. This scope exception does not apply to contracts based on changes in sales or revenues due to changes in market prices.)
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Contracts that are not exchange-traded are not subject to the requirements of this Subtopic if the underlying on which the settlement is based is any one of the following: - aA climatic or geological variable or other physical variable. Climatic, geological, and other physical variables include things like the number of inches of rainfall or snow in a particular area and the severity of an earthquake as measured by the Richter scale. (See Example 13 [paragraph 815-10-55-135].)
- bThe price or value of a nonfinancial asset of one of the parties to the contract provided that the asset is not readily convertible to cash. This scope exception applies only if both of the following are true:
- 1The nonfinancial assets are unique.
- 2The nonfinancial asset related to the underlying is owned by the party that would not benefit under the contract from an increase in the fair value of the nonfinancial asset. (If the contract is a call option, the scope exception applies only if that nonfinancial asset is owned by the party that would not benefit under the contract from an increase in the fair value of the nonfinancial asset above the option's strike price.)
- 1
- cThe fair value of a nonfinancial liability of one of the parties to the contract provided that the liability does not require delivery of an asset that is readily convertible to cash.
- dSpecified volumes of sales or service revenues of one of the parties to the contract. (This scope exception applies to contracts with settlements based on the volume of items sold or services rendered, for example, royalty agreements. This scope exception does not apply to contracts based on changes in sales or revenues due to changes in market prices.)
- eAn underlying that is based on operations or activities specific to one of the parties to the contract. This scope exception applies to underlyings based on the financial operating results (or components of those results) of one of the parties to the contract. This scope exception also applies to underlyings based on the occurrence or nonoccurrence of an event specific to the operations or activities of one of the parties to the contract (such as obtaining regulatory approval, achieving a product development milestone, or achieving a greenhouse gas emissions reduction target). When evaluating whether operations or activities are specific to one of the parties to the contract, an entity does not need to consider whether the outcome is within its control. This scope exception does not apply to any of the following:
- 1Underlyings that are based on a market rate, market price, or market index (including those in paragraph 815-10-15-88(a) through (f)). (See Example 14A—Case F [paragraph 815-10-55-143K] and Case I [paragraphs ] that illustrate the application of this exclusion to the scope exception.)
- 2Underlyings that are based on the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract. For example, the scope exception does not apply to underlyings based on (i) a rate of return or a default rate on a pool of loans held by one of the parties to the contract or (ii) the occurrence or nonoccurrence of an event of default or other credit event by a borrower (or reference entity) on a loan held by one of the parties to the contract. (See Example 14A—Case J [paragraphs ] that illustrates the application of this exclusion to the scope exception.)
- 3Contracts involving an entity’s own equity that are subject to paragraph 815-10-15-74(a) and Subtopic 815-40.
- 4Call options and put options on debt instruments that are subject to paragraphs .
Solely for purposes of applying the scope exception in (e), the term party to the contract includes the parent, subsidiaries, or other entities consolidated by the parent for both consolidated financial statements and the standalone financial statements of individual entities within the consolidated group. - 1
815-10-15-60
If a contract has more than one underlying and some, but not all, of them qualify for one of the scope exceptions in paragraph 815-10-15-59, the application of this Subtopic to that contract depends on its predominant characteristics. That is, the contract is subject to the requirements of this Subtopic if all of its underlyings, considered in combination, behave in a manner that is highly correlated with the behavior of any of the component variables that do not qualify for a scope exception.
815-10-15-61
A contract based on any variable that is not specifically excluded by paragraph 815-10-15-59 is subject to the requirements of this Subtopic if it has the other two characteristics (initial net investment and net settlement) identified in this Subsection.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Paragraph superseded by Accounting Standards Update 2025-07.815-10-15-62
Example 14 (see paragraph 815-10-55-142) illustrates the application of paragraph 815-10-15-59(b).
815-10-15-63
A derivative instrument (whether freestanding or embedded in another contract) whose existence serves as an impediment to recognizing a related contract as a sale by one party or a purchase by the counterparty is not subject to this Subtopic. An example is the existence of a call option enabling a transferor to repurchase transferred assets that is an impediment to sales accounting under Topic 860. Such a call option on transferred financial assets that are not readily obtainable would prevent accounting for that transfer as a sale. The consequence is that to recognize the call option would be to count the same thing twice. The holder of the option already recognizes in its financial statements the assets that it has the option to purchase.
815-10-15-64
A derivative instrument held by a transferor that relates to assets transferred in a transaction accounted for as a financing under Topic 860, but which does not itself serve as an impediment to sale accounting, is not subject to the requirements of this Subtopic if recognizing both the derivative instrument and either the transferred asset or the liability arising from the transfer would result in counting the same thing twice in the transferor's balance sheet. However, if recognizing both the derivative instrument and either the transferred asset or the liability arising from the transfer would not result in counting the same thing twice in the transferor's balance sheet, the derivative instrument shall be accounted for in accordance with this Subtopic. For related implementation guidance, see paragraph 815-10-55-41.
815-10-15-67
A policyholder's investment in a life insurance contract that is accounted for under Subtopic 325-30 is not subject to this Subtopic. This scope exclusion does not affect the accounting by the issuer of the life insurance contract.
815-10-15-68
A contract that is accounted for under either paragraph 960-325-35-1 or 960-325-35-3 is not subject to this Subtopic. This scope exception applies only to the party that accounts for the contract under Topic 960.
815-10-15-68A
The wrapper of a synthetic guaranteed investment contract that meets the definition of a fully benefit-responsive investment contract that is held by an employee benefit plan is excluded from the scope of this Subtopic.
815-10-15-69
For the holder of a commitment to originate a loan (that is, the potential borrower), that commitment is not subject to the requirements of this Subtopic. For issuers of commitments to originate mortgage loans that will be held for investment purposes, as discussed in paragraphs , those commitments are not subject to this Subtopic. In addition, for issuers of loan commitments to originate other types of loans (that is, other than mortgage loans), those commitments are not subject to the requirements of this Subtopic.
815-10-15-70
The preceding paragraph does not affect the accounting for commitments to purchase or sell mortgage loans or other types of loans at a future date. Those types of loan commitments must be evaluated under the definition of a derivative instrument to determine whether this Subtopic applies.
815-10-15-71
Notwithstanding the characteristics discussed in paragraph 815-10-15-83, loan commitments that relate to the origination of mortgage loans that will be held for sale, as discussed in paragraph 948-310-25-3, shall be accounted for as derivative instruments by the issuer of the loan commitment (that is, the potential lender).
815-10-15-72
An interest-only strip or principal-only strip is not subject to the requirements of this Subtopic provided the strip has both of the following characteristics:
- aIt represents the right to receive only a specified proportion of the contractual interest cash flows of a specific debt instrument or a specified proportion of the contractual principal cash flows of that debt instrument.
- bIt does not incorporate any terms not present in the original debt instrument.
815-10-15-73
An allocation of a portion of the interest or principal cash flows of a specific debt instrument as reasonable compensation for stripping the instrument or to provide adequate compensation to a servicer (as defined in Topic 860) would meet the intended narrow nature of the scope exception provided in this paragraph. However, an allocation of a portion of the interest or principal cash flows of a specific debt instrument to provide for a guarantee of payments, for servicing in excess of adequate compensation, or for any other purpose would not meet the intended narrow nature of the scope exception.
815-10-15-74
Notwithstanding the conditions of paragraphs , the reporting entity shall not consider the following contracts to be derivative instruments for purposes of this Subtopic:
- aContracts issued or held by that reporting entity that are both:
- bContracts issued by the entity that are subject to Topic 718. If any such contract ceases to be subject to Topic 718 in accordance with paragraphs , the terms of that contract shall then be analyzed to determine whether the contract is subject to this Subtopic. An award that ceases to be subject to Topic 718 in accordance with those paragraphs shall be analyzed to determine whether it is subject to this Subtopic.
- cAny of the following contracts:
- 1A contract between an acquirer and a seller to enter into a business combination
- 2A contract to enter into an acquisition by a not-for-profit entity
- 3A contract between one or more NFPs to enter into a merger of not-for-profit entities
- 4In a joint venture’s separate financial statements, a contract between a joint venture and its venturers related to the formation of the joint venture accounted for in accordance with Subtopic 805-60.
- 1
- dForward contracts that require settlement by the reporting entity's delivery of cash in exchange for the acquisition of a fixed number of its equity shares (forward purchase contracts for the reporting entity's shares that require physical settlement) that are accounted for under paragraphs , 480-10-35-3, and 480-10-45-3.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Notwithstanding the conditions of paragraphs and , the reporting entity shall not consider the following contracts to be derivative instruments for purposes of this Subtopic: - aContracts issued or held by that reporting entity that are both:
- bContracts issued by the entity that are subject to Topic 718. If any such contract ceases to be subject to Topic 718 in accordance with paragraphs , the terms of that contract shall then be analyzed to determine whether the contract is subject to this Subtopic. An award that ceases to be subject to Topic 718 in accordance with those paragraphs shall be analyzed to determine whether it is subject to this Subtopic.
- cAny of the following contracts:
- 1A contract between an acquirer and a seller to enter into a business combination
- 2A contract to enter into an acquisition by a not-for-profit entity
- 3A contract between one or more NFPs to enter into a merger of not-for-profit entities
- 4In a joint venture’s separate financial statements, a contract between a joint venture and its venturers related to the formation of the joint venture accounted for in accordance with Subtopic 805-60.
- 1
- dForward contracts that require settlement by the reporting entity's delivery of cash in exchange for the acquisition of a fixed number of its equity shares (forward purchase contracts for the reporting entity's shares that require physical settlement) that are accounted for under paragraphs , 480-10-35-3, and 480-10-45-3.
815-10-15-75
The scope exceptions in paragraph 815-10-15-74 do not apply to either of the following:
- aThe counterparty in those contracts. For example, the scope exception in (b) in the preceding paragraph related to share-based compensation arrangements does not apply to equity instruments (including stock options) received by nonemployees as compensation for goods and services.
- bA contract that an entity either can or must settle by issuing its own equity instruments but that is indexed in part or in full to something other than its own stock. That contract can be a derivative instrument for the issuer under paragraphs , in which case it would be accounted for as a liability or an asset in accordance with the requirements of this Subtopic. For example, a forward contract that is indexed to both an entity's own stock and currency exchange rates does not qualify for the exception in (a) in the preceding paragraph with respect to that entity's accounting because the forward contract is indexed in part to something other than that entity's own stock (namely, currency exchange rates).
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The scope exceptions in paragraph 815-10-15-74 do not apply to either of the following:- aThe counterparty in those contracts. For example, the scope exception in (b) in paragraph 815-10-15-74related to share-based compensation arrangements does not apply to equity instruments (including stock options) received by nonemployees as compensation for goods and services.
- bA contract that an entity either can or must settle by issuing its own equity instruments but that is indexed in part or in full to something other than its own stock. That contract can be a derivative instrument for the issuer under paragraphs and , in which case it would be accounted for as a liability or an asset in accordance with the requirements of this Subtopic. For example, a forward contract that is indexed to both an entity's own stock and currency exchange rates does not qualify for the exception in (a) in paragraph 815-10-15-74with respect to that entity's accounting because the forward contract is indexed in part to something other than that entity's own stock (namely, currency exchange rates).
815-10-15-75A
For purposes of evaluating whether a financial instrument meets the scope exception in paragraph 815-10-15-74(a)(1), a down round feature shall be excluded from the consideration of whether the instrument is indexed to the entity's own stock.
815-10-15-76
Temporary equity is considered stockholders' equity for purposes of the scope exception in paragraph 815-10-15-74(a) even if it is required to be displayed outside of the permanent equity section.
815-10-15-77
For guidance on determining whether a freestanding financial instrument or embedded feature is not precluded from qualifying for the first part of the scope exception in paragraph 815-10-15-74(a), see the guidance beginning in paragraph 815-40-15-5.For guidance on determining whether a freestanding financial instrument or embedded feature qualifies for the second part of the scope exception in paragraph 815-10-15-74(a), see the guidance beginning in paragraph 815-40-25-1.
815-10-15-78
Paragraph 815-40-25-39 explains that, for purposes of evaluating under this Subtopic whether an embedded derivative indexed to an entity's own stock would be classified in stockholders' equity if freestanding, the additional considerations necessary for equity classifications beginning in paragraph 815-40-25-7 do not apply if the hybrid contract is a convertible debt instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash (at the discretion of the issuer).
815-10-15-79
Leases that are within the scope of Topic 842 are not derivative instruments subject to this Subtopic, although a derivative instrument embedded in a lease may be subject to the requirements of paragraph 815-15-25-1.
815-10-15-80
Residual value guarantees that are subject to the requirements of Topic 842 on leases are not subject to the requirements of this Subtopic.
815-10-15-81
A third-party residual value guarantor shall consider the guidance in this Subtopic for all residual value guarantees that it provides to determine whether they are derivative instruments and whether they qualify for any of the scope exceptions in this Subtopic. The guarantees described in paragraph 842-10-15-43 for which the exceptions of paragraphs 460-10-15-7(b) and 460-10-25-1(a) do not apply are subject to the initial recognition, initial measurement, and disclosure requirements of Topic 460.
815-10-15-82
Registration payment arrangements within the scope of Subtopic 825-20 are not subject to the requirements of this Subtopic. The exception in this paragraph applies to both the issuer that accounts for the arrangement pursuant to that Subtopic and the counterparty.
815-10-15-82A
Fixed-odds wagering contracts for an entity operating as a casino and for the casino operations of other entities are within the scope of Topic 606 on revenue from contracts with customers. See paragraph 924-815-15-1.
815-10-15-82B
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1Environmental credits and environmental credit obligations shall be accounted for in accordance with Topic 818 and are not subject to this Subtopic. Definition of Derivative Instrument
815-10-15-83
A derivative instrument is a financial instrument or other contract with all of the following characteristics:
- aUnderlying, notional amount, payment provision. The contract has both of the following terms, which determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required:
- 1One or more underlyings
- 2One or more notional amounts or payment provisions or both.
- 1
- bInitial net investment. The contract requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
- cNet settlement. The contract can be settled net by any of the following means:
- 1Its terms implicitly or explicitly require or permit net settlement.
- 2It can readily be settled net by a means outside the contract.
- 3It provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.
- 1
815-10-15-84
In this Topic, both of the following are collectively referred to as derivative instruments:
- aA derivative instrument included within the scope of this Subtopic by this Subsection
- bAn embedded derivative that has been separated from a host contract as required by paragraph 815-15-25-1.
815-10-15-85
The terms underlying, notional amount, payment provision, and settlement are intended to include the plural forms in the remainder of this Topic. Including both the singular and plural forms is more accurate but much more awkward and impairs the readability.
815-10-15-86
Following is further discussion of each of the three characteristics of a derivative instrument:
- aUnderlying, notional amount, payment provision
- bInitial net investment
- cNet settlement.
815-10-15-87
Following is further discussion of the features that relate to the settlement amount(s) of a derivative instrument:
- aUnderlying
- bNotional amount
- cPayment provision.
815-10-15-88
An underlying is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument. An underlying usually is one or a combination of the following:
- aA security price or security price index
- bA commodity price or commodity price index
- cAn interest rate or interest rate index
- dA credit rating or credit index
- eAn exchange rate or exchange rate index
- fAn insurance index or catastrophe loss index
- gA climatic or geological condition (such as temperature, earthquake severity, or rainfall), another physical variable, or a related index
- hThe occurrence or nonoccurrence of a specified event (such as a scheduled payment under a contract).
815-10-15-89
However, an underlying may be any variable whose changes are observable or otherwise objectively verifiable. An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.
815-10-15-90
Reference to either a notional amount or a payment provision is needed in relation to an underlying to compute the contract's periodic settlements and resulting changes in fair value.
815-10-15-91
Example 3 (see paragraph 815-10-55-77) illustrates the determination of an underlying if a commodity contract includes a fixed element and a variable element.
815-10-15-92
A notional amount is a number of currency units, shares, bushels, pounds, or other units specified in the contract. Other names are used, for example, the notional amount is called a face amount in some contracts. The settlement of a derivative instrument with a notional amount is determined by interaction of that notional amount with the underlying. The interaction may be simple multiplication, or it may involve a formula with leverage factors or other constants. As defined in the glossary, the effective notional amount is the stated notional amount adjusted for any leverage factor. If a requirements contract contains explicit provisions that support the calculation of a determinable amount reflecting the buyer's needs, then that contract has a notional amount. See paragraphs for related implementation guidance. For implementation guidance on identifying a commodity contract's notional amount, see paragraph 815-10-55-5.
815-10-15-93
As defined in the glossary, a payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner. For example, a derivative instrument might require a specified payment if a referenced interest rate increases by 300 basis points.
815-10-15-94
Many derivative instruments require no initial net investment. Some require an initial net investment as compensation for one or both of the following:
- aTime value (for example, a premium on an option)
- bTerms that are more or less favorable than market conditions (for example, a premium on a forward purchase contract with a price less than the current forward price).
815-10-15-95
A derivative instrument does not require an initial net investment in the contract that is equal to the notional amount (or the notional amount plus a premium or minus a discount) or that is determined by applying the notional amount to the underlying. For example:
- aA commodity futures contract generally requires no net investment, while purchasing the same commodity requires an initial net investment equal to its market price. However, both contracts reflect changes in the price of the commodity in the same way (that is, similar gains or losses will be incurred).
- bA swap or forward contract generally does not require an initial net investment unless the terms favor one party over the other.
- cAn option generally requires that one party make an initial net investment (a premium) because that party has the rights under the contract and the other party has the obligations.
815-10-15-96
If the initial net investment in the contract (after adjustment for the time value of money) is less, by more than a nominal amount, than the initial net investment that would be commensurate with the amount that would be exchanged either to acquire the asset related to the underlying or to incur the obligation related to the underlying, the characteristic in paragraph 815-10-15-83(b) is met. The amount of that asset acquired or liability incurred should be comparable to the effective notional amount of the contract. This does not imply that a slightly off-market contract cannot be a derivative instrument in its entirety. That determination is a matter of facts and circumstances and shall be evaluated on a case-by-case basis. Example 16, Case C (see paragraph 815-10-55-166) illustrates the guidance in this paragraph.
815-10-15-97
A contract that requires an initial net investment in the contract that is in excess of the amount determined by applying the effective notional amount to the underlying is not a derivative instrument in its entirety. Example 16, Case A (see paragraph 815-10-55-150) illustrates such a contract.
815-10-15-98
The phrase initial net investment is stated from the perspective of only one party to the contract, but it determines the application of this Subtopic for both parties. Even though a contract may be a derivative instrument as described in paragraphs for both parties, the scope exceptions in paragraphs apply only to the issuer of the contract and will result in different reporting by the two parties. The normal purchases and sales scope exception (beginning in paragraph 815-10-15-22) also may apply to one of the parties but not the other.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The phrase initial net investment is stated from the perspective of only one party to the contract, but it determines the application of this Subtopic for both parties. Even though a contract may be a derivative instrument as described in paragraphs and for both parties, the scope exceptions in paragraphs apply only to the issuer of the contract and will result in different reporting by the two parties. The normal purchases and sales scope exception (beginning in paragraph 815-10-15-22) also may apply to one of the parties but not the other. 815-10-15-99
A contract fits the description in paragraph 815-10-15-83(c) if its settlement provisions meet criteria for any of the following:
- aNet settlement under contract terms
- bNet settlement through a market mechanism
- cNet settlement by delivery of derivative instrument or asset readily convertible to cash.
815-10-15-100
In this form of net settlement, neither party is required to deliver an asset that is associated with the underlying and that has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount (or the notional amount plus a premium or minus a discount). (For example, most interest rate swaps do not require that either party deliver interest-bearing assets with a principal amount equal to the notional amount of the contract.) Net settlement may be made in cash or by delivery of any other asset (such as the right to receive future payments—see the discussion beginning in paragraph 815-10-15-104), whether or not that asset is readily convertible to cash.
815-10-15-101
Further considerations in the application of this form of net settlement are addressed as follows:
- aNet share settlement
- bNet settlement in the event of nonperformance or default
- cStructured settlement as net settlement
- dNet settlement of a debt instrument through exercise of an embedded put option or call option.
815-10-15-102
The net settlement criterion as described in paragraph 815-10-15-83(c) and related paragraphs in this Subsection is met if a contract provides for net share settlement at the election of either party. Therefore, if either counterparty could net share settle a contract, then it would be considered to have the net settlement characteristic of a derivative instrument regardless of whether the net shares received were readily convertible to cash as described in paragraph 815-10-15-119 or were restricted for more than 31 days as discussed beginning in paragraph 815-10-15-130. While this conclusion applies to both investors and issuers of contracts, issuers of those net share settled contracts shall consider whether such contracts qualify for the scope exception in paragraph 815-10-15-74(a). See Example 5 (paragraph 815-10-55-90).
815-10-15-103
Penalties for nonperformance may give a contract the characteristic of net settlement. For example:
- aA penalty for nonperformance in a purchase order is a net settlement provision if the amount of the penalty is based on changes in the price of the items that are the subject of the contract.
- bA fixed penalty for nonperformance is not a net settlement provision.
- cA contract that contains a variable penalty for nonperformance based on changes in the price of the items that are the subject of the contract does not contain a net settlement provision as discussed beginning in paragraph 815-10-15-100 if it also contains an incremental penalty of a fixed amount (or fixed amount per unit) that would be expected to be significant enough at all dates during the remaining term of the contract to make the possibility of nonperformance remote. If a contract includes such a provision, it effectively requires performance, that is, requires the party to deliver an asset that is associated with the underlying. The assessment of the fixed incremental penalty shall be performed only at the contract's inception. The magnitude of the fixed incremental penalty shall be assessed on a standalone basis as a disincentive for nonperformance, not in relation to the overall penalty.
- dAn asymmetrical default provision does not give a commodity forward contract the characteristic described as net settlement beginning in paragraph 815-10-15-100. For related implementation guidance, see the discussion beginning in paragraph 815-10-55-10.
815-10-15-104
Upon settlement of a contract, in lieu of immediate net cash settlement of the gain or loss under the contract, the holder may receive a financial instrument involving terms that would provide for the gain or loss under the contract to be received or paid over a specified time period. A contract that provides for such a structured payout of the gain (or loss) resulting from that contract meets the characteristic of net settlement in paragraphs if the fair value of the cash flows to be received (or paid) by the holder under the structured payout are approximately equal to the amount that would have been received (or paid) if the contract had provided for an immediate payout related to settlement of the gain (or loss) under the contract. The fact that a contract accomplishes settlement by requiring the party in a loss position under the contract to make cash payments over a specified timeframe to the party in a gain position (in lieu of immediate cash settlement of the gain) does not preclude the contract from meeting the characteristic of net settlement in those paragraphs.
815-10-15-105
A contract that requires additional investing or borrowing to obtain the benefits of the contract's gain only over time as a traditional adjustment of the yield on the amount invested or the interest element on the amount borrowed does not meet the characteristic of net settlement.
815-10-15-106
Contracts that require one party to the contract to invest funds in or borrow funds from the other party so that the party in a gain position under the contract can obtain the value of that gain over time as a nontraditional adjustment of the yield on the amount invested or the interest element on the amount borrowed may meet the characteristic of net settlement. See related implementation guidance beginning in paragraph 815-10-55-19.
815-10-15-107
The potential settlement of the debtor's obligation to the creditor that would occur upon exercise of a put option or call option embedded in a debt instrument meets the net settlement criterion as discussed beginning in paragraph 815-10-15-100 because neither party is required to deliver an asset that is associated with the underlying. Specifically:
- aThe debtor does not receive an asset when it settles the debt obligation in conjunction with exercise of the put option or call option.
- bThe creditor does not receive an asset associated with the underlying.
815-10-15-108
The guidance in the preceding paragraph shall be applied under both of the following circumstances:
- aWhen applying paragraph 815-15-25-1(c) to a put option or call option (including a prepayment option) embedded in a debt instrument
- bWhen analyzing the net settlement criterion (see guidance beginning in paragraph 815-10-15-100) for a freestanding call option held by the debtor on its own debt instrument and for a freestanding put option issued by the debtor on its own debt instrument.
815-10-15-109
The guidance in paragraph 815-10-15-107 shall not be applied under either of the following circumstances:
- aTo put or call options that are added to a debt instrument by a third party contemporaneously with or after the issuance of a debt instrument. (In that circumstance, see paragraph 815-10-15-6.)
- bBy analogy to an embedded put or call option in a hybrid instrument that does not contain a debt host contract.
815-10-15-109A
Further considerations are addressed as follows:
- aPrimary characteristics of market mechanism
- bIndicators of primary characteristics of market mechanism
- cEffects of an assignment clause on market mechanism
- dOngoing evaluation of market mechanism.
815-10-15-110
In this form of net settlement, one of the parties is required to deliver an asset of the type described in paragraph 815-10-15-100, but there is an established market mechanism that facilitates net settlement outside the contract. (For example, an exchange that offers a ready opportunity to sell the contract or to enter into an offsetting contract.) Market mechanisms may have different forms. Many derivative instruments are actively traded and can be closed or settled before the contract's expiration or maturity by net settlement in active markets.
815-10-15-111
The term market mechanism is to be interpreted broadly and includes any institutional arrangement or other agreement having the requisite characteristics. Regardless of its form, an established market mechanism must have all of the following primary characteristics:
- aIt is a means to settle a contract that enables one party to readily liquidate its net position under the contract. A market mechanism is a means to realize the net gain or loss under a particular contract through a net payment. Net settlement may occur in cash or any other asset. A method of settling a contract that results only in a gross exchange or delivery of an asset for cash (or other payment in kind) does not satisfy the requirement that the mechanism facilitate net settlement.
- bIt results in one party to the contract becoming fully relieved of its rights and obligations under the contract. A market mechanism enables one party to the contract to surrender all future rights or avoid all future performance obligations under the contract. Contracts that do not permit assignment of the contract from the original issuer to another party do not meet the characteristic of net settlement through a market mechanism. The ability to enter into an offsetting contract, in and of itself, does not constitute a market mechanism because the rights and obligations from the original contract survive. The fact that an entity has offset its rights and obligations under an original contract with a new contract does not by itself indicate that its rights and obligations under the original contract have been relieved. This applies to contracts regardless of whether either of the following conditions exists:
- 1The asset associated with the underlying is financial or nonfinancial.
- 2The offsetting contract is entered into with the same counterparty as the original contract or a different counterparty (unless an offsetting contract with the same counterparty relieves the entity of its rights and obligations under the original contract, in which case the arrangement does constitute a market mechanism). (Example 6 [see paragraph 815-10-55-91] illustrates this guidance.)
- 1
- cLiquidation of the net position does not require significant transaction costs. For purposes of assessing whether a market mechanism exists, an entity shall consider transaction costs to be significant if they are 10 percent or more of the fair value of the contract. Whether assets deliverable under a group of futures contracts exceeds the amount of assets that could rapidly be absorbed by the market without significantly affecting the price is not relevant to this characteristic. The lack of a liquid market for a group of contracts does not affect the determination of whether there is a market mechanism that facilitates net settlement because the test focuses on a singular contract. An exchange offers a ready opportunity to sell each contract, thereby providing relief of the rights and obligations under each contract. The possible reduction in price due to selling a large futures position is not considered to be a transaction cost.
- dLiquidation of the net position under the contract occurs without significant negotiation and due diligence and occurs within a time frame that is customary for settlement of the type of contract. A market mechanism facilitates easy and expedient settlement of the contract. As discussed under the primary characteristic in (a), those qualities of a market mechanism do not preclude net settlement in assets other than cash.
815-10-15-113
Entities shall consider the indicators in the following paragraph for each of the primary characteristics in determining whether a method of settling a contract qualifies as an established market mechanism. All of the indicators need not be present for an entity to conclude that a market mechanism exists for a particular contract.
815-10-15-114
The following are indicators that the primary characteristic in paragraph 815-10-15-111(a) is met:
- aAccess to potential counterparties is available regardless of the seller's size or market position.
- bRisks assumed by a market maker as a result of acquiring a contract can be transferred by a means other than by repackaging the original contract into a different form.
815-10-15-115
The following are indicators that the primary characteristic in paragraph 815-10-15-111(b) is met:
- aThere are multiple market participants willing and able to enter into a transaction at market prices to assume the seller's rights and obligations under a contract.
- bThere is sufficient liquidity in the market for the contract, as indicated by the transaction volume as well as a relatively narrow observable bid-ask spread.
815-10-15-116
The following are indicators that primary characteristic in paragraph 815-10-15-111(d) is met:
- aBinding prices for the contract are readily obtainable.
- bTransfers of the instrument involve standardized documentation (rather than contracts with entity-specific modifications) and standardized settlement procedures.
- cIndividual contract sales do not require significant negotiation and unique structuring.
- dThe closing period is not extensive because of the need to permit legal consultation and document review.
815-10-15-117
As noted in the primary characteristic in paragraph 815-10-15-111(b), an assessment of the substance of any assignment clause is required to determine whether that assignment clause precludes a party from being relieved of all rights and obligations under the contract. Although permission to assign a contract shall not be unreasonably withheld by the counterparty in accordance with the terms of a contract, an assignment feature cannot be viewed simply as a formality because it may be invoked at any time to prevent the nonassigning party from being exposed to unacceptable credit or performance risk. Accordingly, the existence of an assignment clause may or may not permit a party from being relieved of its rights and obligations under the contract. If it is remote that the counterparty will withhold permission to assign the contract, the mere existence of the clause shall not preclude the contract from possessing the net settlement characteristic described in paragraph 815-10-15-110 as a market mechanism. Such a determination requires assessing whether a sufficient number of acceptable potential assignees exist in the marketplace such that assignment of the contract would not result in imposing unacceptable credit risk or performance risk on the nonassigning party. Consideration shall be given to past counterparty and industry practices regarding whether permission to be relieved of all rights and obligations under similar contracts has previously been withheld. However, if it is reasonably possible or probable that the counterparty will withhold permission to assign the contract, the contract does not possess the net settlement characteristic described in paragraph 815-10-15-110 as a market mechanism.
815-10-15-118
The evaluation of whether a market mechanism exists shall be performed at inception and on an ongoing basis throughout a contract's life. Example 4, Case A (see paragraph 815-10-55-86) illustrates this guidance.
815-10-15-119
In this form of net settlement, one of the parties is required to deliver an asset of the type described in paragraph 815-10-15-100, but that asset is readily convertible to cash or is itself a derivative instrument.
815-10-15-120
An example of a contract with this form of net settlement is a forward contract that requires delivery of an exchange-traded equity security. Even though the number of shares to be delivered is the same as the notional amount of the contract and the price of the shares is the underlying, an exchange-traded security is readily convertible to cash. Another example is a swaption—an option to require delivery of a swap contract, which is a derivative instrument.
815-10-15-121
Examples of assets that are readily convertible to cash include a security or commodity traded in an active market and a unit of foreign currency that is readily convertible into the functional currency of the reporting entity.
815-10-15-122
An asset (whether financial or nonfinancial) shall be considered to be readily convertible to cash only if the net amount of cash that would be received from a sale of the asset in an active market is either equal to or not significantly less than the amount an entity would typically have received under a net settlement provision. The net amount that would be received upon sale need not be equal to the amount typically received under a net settlement provision. Parties generally should be indifferent as to whether they exchange cash or the assets associated with the underlying, although the term indifferent is not intended to imply an approximate equivalence between net settlement and proceeds from sale in an active market.
815-10-15-123
The form of a financial instrument is important; individual instruments cannot be combined for evaluation purposes to circumvent compliance with the criteria beginning in paragraph 815-10-15-119. Example 8 (see paragraph 815-10-55-111) illustrates this guidance.
815-10-15-124
Discussion of additional matters relevant to this form of net settlement is organized as follows:
- aEffect of conversion costs
- bContracts involving multiple deliveries
- cAsset's suitability as collateral does not equate to asset being readily convertible to cash
- dDetermining whether shares of stock are readily convertible to cash
- eOngoing evaluation of readily convertible to cash.
815-10-15-125
If an entity determines that the estimated costs that would be incurred to immediately convert the asset to cash are not significant, then receipt of that asset puts the entity in a position not substantially different from net settlement. Therefore, an entity shall evaluate, in part, the significance of the estimated costs of converting the asset to cash in determining whether those assets are readily convertible to cash.
815-10-15-126
For purposes of assessing significance of such costs, an entity shall consider those estimated conversion costs to be significant only if they are 10 percent or more of the gross sales proceeds (based on the spot price at the inception of the contract) that would be received from the sale of those assets in the closest or most economical active market.
815-10-15-127
The assessment of the significance of those conversion costs shall be performed only at inception of the contract.
815-10-15-128
For contracts that involve multiple deliveries of the asset, the phrase in an active market that can rapidly absorb the quantity held by the entity in the definition of readily convertible to cash shall be applied separately to the expected quantity in each delivery.
815-10-15-129
The ability to use a security that is not publicly traded or an agricultural or mineral product without an active market as collateral in a borrowing does not, in and of itself, mean that the security or the commodity is readily convertible to cash.
815-10-15-130
A security that is publicly traded but for which the market is not very active is readily convertible to cash if the number of shares or other units of the security to be exchanged is small relative to the daily transaction volume. That same security would not be readily convertible if the number of shares to be exchanged is large relative to the daily transaction volume.
815-10-15-131
Shares of stock in a publicly traded entity to be received upon the exercise of a stock purchase warrant do not meet the characteristic of being readily convertible to cash if both of the following conditions exist:
- aThe stock purchase warrant is issued by an entity for only its own stock (or stock of its consolidated subsidiaries).
- bThe sale or transfer of the issued shares is restricted (other than in connection with being pledged as collateral) for a period of 32 days or more from the date the stock purchase warrant is exercised.
815-10-15-132
Restrictions imposed by a stock purchase warrant on the sale or transfer of shares of stock that are received from the exercise of that warrant issued by an entity for other than its own stock (whether those restrictions are for more or less than 32 days) do not affect the determination of whether those shares are readily convertible to cash. The accounting for restricted stock to be received upon exercise of a stock purchase warrant shall not be analogized to any other type of contract.
815-10-15-133
Newly outstanding shares of common stock in a publicly traded company to be received upon exercise of a stock purchase warrant cannot be considered readily convertible to cash if, upon issuance of the shares, the sale or transfer of the shares is restricted (other than in connection with being pledged as collateral) for more than 31 days from the date the stock purchase warrant is exercised (not the date the warrant is issued), unless the holder has the power by contract or otherwise to cause the requirement to be met within 31 days of the date the stock purchase warrant is exercised.
815-10-15-134
In contrast, if the sale of an actively traded security is restricted for 31 days or less from the date the stock purchase warrants are exercised, that limitation is not considered sufficiently significant to serve as an impediment to considering the shares to be received upon exercise of those stock purchase warrants as readily convertible to cash.
815-10-15-135
The guidance that a restriction for more than 31 days prevents the shares from being considered readily convertible to cash applies only to stock purchase warrants issued by an entity for its own shares of stock, in which case the shares being issued upon exercise are newly outstanding (including issuance of treasury shares) and are restricted with respect to their sale or transfer for a specified period of time beginning on the date the stock purchase warrant is exercised.
815-10-15-136
However, even if the sale or transfer of the shares is restricted for 31 days or less after the stock purchase warrant is exercised, an entity still must evaluate both of the following criteria:
- aWhether an active market can rapidly absorb the quantity of stock to be received upon exercise of the warrant without significantly affecting the price
- bWhether the other estimated costs to convert the stock to cash are expected to be not significant. (The assessment of the significance of those conversion costs shall be performed only at inception of the contract.)
815-10-15-137
If the shares of an actively traded common stock to be received upon exercise of the stock purchase warrant can be reasonably expected to qualify for sale within 31 days of their receipt, such as may be the case under SEC Rule 144, Selling Restricted and Control Securities, or similar rules of the SEC, any initial sales restriction is not an impediment to considering those shares as readily convertible to cash, as that phrase is used in paragraph 815-10-15-119. (However, a restriction on the sale or transfer of shares of stock that are received from an entity other than the issuer of that stock through the exercise of another option or the settlement of a forward contract is not an impediment to considering those shares readily convertible to cash, regardless of whether the restriction is for a period that is more or less than 32 days from the date of exercise or settlement.)
815-10-15-138
Paragraph 815-10-15-141 explains that the guidance in the Certain Contracts on Debt and Equity Securities Subsections applies to those warrants that are not derivative instruments subject to this Topic but that involve the acquisition of securities that will be accounted for under either Topic 320 or Topic 321. However, such warrants are not eligible to be hedging instruments.
815-10-15-139
The evaluation of whether items to be delivered under a contract are readily convertible to cash shall be performed at inception and on an ongoing basis throughout a contract's life (except that, as stated in paragraph 815-10-15-127, the assessment of the significance of those conversion costs shall be performed only at inception of the contract). Example 4, Cases B, C, and D (see paragraphs ) illustrate this guidance.
Certain Contracts on Debt and Equity Securities
Overall Guidance
815-10-15-140
The guidance in the Certain Contracts on Debt and Equity Securities Subsections applies to all entities, with specific instrument qualifications noted below.
Instruments
815-10-15-141
The guidance in the Certain Contracts on Debt and Equity Securities Subsections applies only to those forward contracts and purchased options having all of the following characteristics:
- a
- b The contract's terms require physical settlement of the contract by delivery of the securities.
- c The contract is not a derivative instrument otherwise subject to this Subtopic.
- d The contract, if a purchased option, has no intrinsic value at acquisition.
815-10-15-141A
For the purposes of applying paragraph 815-10-15-141(a) for forward contracts and purchased options, an entity shall not consider whether, upon the settlement of the forward contract or the exercise of the purchased option, individually or with existing investments, the underlying securities would be accounted for under either of the following:
- a The equity method in accordance with Topic 323
- b
815-10-15-142
The guidance in the Certain Contracts on Debt and Equity Securities Subsections does not apply to contracts involving securities not within the scope of either Topic 320 or Topic 321, after considering the guidance in paragraph 815-10-15-141A.
815-10-25Recognition
Source downloaded: .Record version 18ca49cb5ebe. Effective date must be checked in the source.
815-10-25-1
An entity shall recognize all of its derivative instruments in its statement of financial position as either assets or liabilities depending on the rights or obligations under the contracts.
815-10-25-2
If a contract that did not meet the definition of a derivative instrument at acquisition by the entity meets the definition of a derivative instrument after acquisition by the entity, the contract shall be recognized immediately as either an asset or liability with the offsetting entry recorded in earnings.
815-10-25-3
If a contract ceases to be a derivative instrument pursuant to this Subtopic and an asset or liability had been recorded for that contract, the carrying amount of that contract becomes its cost basis and the entity shall apply other generally accepted accounting principles (GAAP) that are applicable to that contract prospectively from the date that the contract ceased to be a derivative instrument. If the derivative instrument had been designated in a cash flow hedging relationship and a gain or loss is recorded in accumulated other comprehensive income, then the guidance in Sections 815-30-35 and 815-30-40 shall be applied accordingly.
815-10-25-4
Synthetic instrument accounting is prohibited.
815-10-25-5
The remainder of this Section addresses the following matters:
- aUnit of accounting for recognition purposes
- b
- cForward commitment dollar rolls
- dDerivative financial instruments subject to a registration payment arrangement.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
606-10-65-3The remainder of this Section addresses the following matters:- aUnit of accounting for recognition purposes
- b
- cForward commitment dollar rolls
- dDerivative financial instruments subject to a registration payment arrangement
- eShare-based noncash consideration from a customer for the transfer of goods or services under Topic 606
- fShare-based noncash consideration from a counterparty for the transfer of nonfinancial assets or in substance nonfinancial assets under Subtopic 610-20.
Unit of Accounting for Recognition Purposes
815-10-25-5A
This Section addresses the following unit of accounting questions with respect to recognition:
- aViewing two freestanding derivative instruments as a unit. Whether two or more contracts that are derivative instruments within the scope application of this Subtopic should be viewed as a unit for recognition and other purposes—including for hedge accounting purposes—is addressed beginning in paragraph 815-10-25-6.
- bViewing combinations of options as separate options or as a single forward contract. Whether combinations of options that individually are within the scope application of this Subtopic or Subtopic 815-15 should be viewed as separate options or as a single forward is addressed beginning in paragraph 815-10-25-7.
815-10-25-5B
Paragraph 815-10-15-4A explains that Section 815-10-15 addresses the following unit of accounting questions on scope:
- aViewing a contract as freestanding or embedded. Whether a feature should be viewed as freestanding or embedded in determining the scope application of this Subtopic and Subtopic 815-15 is addressed beginning in paragraph 815-10-15-5.
- bViewing two or more contracts as a unit in applying the scope of this Subtopic. Whether two or more legally separate transactions should be viewed as a unit in determining the scope application of this Subtopic is addressed beginning in paragraph 815-10-15-8.
815-10-25-6
This Subtopic generally does not provide for the combination of separate financial instruments to be evaluated as a unit, unless, pursuant to paragraph 815-20-25-45, two or more derivative instruments in combination are jointly designated as a hedging instrument. If separate derivative instruments have all of the following characteristics, judgment shall be applied to determine whether the separate derivative instruments have been entered into in lieu of a structured transaction in an effort to circumvent GAAP:
- aThey are entered into contemporaneously and in contemplation of one another. (See Example 18 [paragraph 815-10-55-171] for an illustration.)
- bThey are entered into with the same counterparty.
- cThey relate to the same risk.
- dThere is no substantive business purpose for structuring the transactions separately.
815-10-25-7
This guidance addresses a combination of two options—one that is a purchased call (put) option and another that is a written put (call) option—having all of the following characteristics:
- aThey have the same strike price, notional amount, and exercise date.
- bThey have the same underlying.
- cNeither is required to be exercised.
815-10-25-8
The guidance addresses such options in two contexts:
- aCombinations of two freestanding options or a freestanding and embedded option
- bCombinations of two embedded options.
815-10-25-9
Derivative instruments that are transferable are, by their nature, separate and distinct contracts. Accordingly, a separate freestanding purchased call (put) option and written put (call) option with all of the characteristics in paragraph 815-10-25-7 convey rights and obligations that are distinct whether involving the same or different counterparties and do not warrant bundling as a single forward contract for accounting purposes under this Subtopic by any party to the contracts. (The separate purchased option and written option can be viewed in combination and jointly designated as the hedging instrument pursuant to paragraph 815-20-25-45.)
815-10-25-9A
A combination of a freestanding purchased call (put) option and a freestanding or embedded (nontransferable) written put (call) option shall be considered for accounting purposes as separate option contracts, rather than a single forward contract, by both parties to the contracts even though all of the following conditions are met:
- aThe options have the same terms.
- bThe options have the same underlying.
- cThe options are entered into contemporaneously with the same counterparty at inception.
815-10-25-9B
Both a combination of a freestanding purchased call (put) option and a freestanding or embedded (nontransferable) written put (call) option and a combination of a freestanding written call (put) option and an embedded (nontransferable) purchased put (call) option shall be considered for accounting purposes as separate option contracts, rather than a single forward contract, by both parties to the contracts even though all of the following conditions are met:
- aThe options have the same terms.
- bThe options have the same underlying.
- cThe options are entered into contemporaneously with different counterparties at inception.
815-10-25-10
A combination of an embedded (nontransferable) purchased call (put) option and an embedded (nontransferable) written put (call) option in a single hybrid instrument with all of the characteristics in paragraph 815-10-25-7and that are entered into contemporaneously with the same counterparty shall be considered as a single forward contract for purposes of applying the provisions of this Subtopic. The notion of the same counterparty encompasses contracts entered into directly with a single counterparty and contracts entered into with a single party that are structured through an intermediary. (Note that a share of stock being puttable by the holder and callable by the issuer under the same terms does not render the stock mandatorily redeemable under the provisions of Topic 480.) Topic 480 requires that mandatorily redeemable financial instruments be classified as liabilities.
815-10-25-11
The embedded options are in substance an embedded forward contract because they meet both of the following conditions:
- aThey convey rights (to the holder) and obligations (to the writer) that are equivalent from an economic and risk perspective to an embedded forward contract.
- bThey cannot be separated from the hybrid instrument in which they are embedded.
815-10-25-12
Even though neither party is required to exercise its purchased option, the result of the overall structure is a hybrid instrument that will likely be redeemed at a point earlier than its stated maturity. That result is expected by both the hybrid instrument's issuer and investor regardless of whether the embedded feature that triggers the redemption is in the form of two separate options or a single forward contract.
815-10-25-13
However, if either party is required to exercise its purchased option before the stated maturity date of the hybrid instrument, the hybrid instrument shall not be viewed for accounting purposes as containing one or more embedded derivatives. In substance, the debtor (issuer) and creditor (investor) have agreed to terms that accelerate the stated maturity of the hybrid instrument and the exercise date of the option is essentially the hybrid instrument's actual maturity date. As a result, it is inappropriate to characterize the hybrid instrument as containing either of the following:
- aTwo embedded option contracts that are exercisable only on the actual maturity date
- bAn embedded forward contract that is a combination of an embedded purchased call (put) and a written put (call) with the same terms.
Forward Commitment Dollar Rolls
815-10-25-15
Forward commitment dollar rolls that are not otherwise subject to this Subtopic's provisions shall be recognized as either assets or liabilities depending on the rights or obligations under the contracts.
Derivative Financial Instruments Subject to a Registration Payment Arrangement
815-10-25-16
Paragraphs 825-20-25-2 and 825-20-30-2 require that a financial instrument subject to a registration payment arrangement be recognized and measured in accordance with other applicable GAAP (for example, this Subtopic) without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. That is, those paragraphs require that an entity recognize and measure a registration payment arrangement as a separate unit of account from the financial instrument(s) subject to that arrangement.
Share-Based Noncash Consideration from a Customer for the Transfer of Goods or Services under Topic 606
815-10-25-16A
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
606-10-65-3An entity shall not apply the guidance in this Topic to share-based noncash consideration from a customer for the transfer of goods or services unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under Topic 606 in accordance with paragraph 606-10-15-3A.Share-Based Noncash Consideration from a Counterparty for the Transfer of Nonfinancial Assets or In Substance Nonfinancial Assets under Subtopic 610-20
815-10-25-16B
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
606-10-65-3An entity shall not apply the guidance in this Topic to share-based noncash consideration from a counterparty for the transfer of nonfinancial assets or in substance nonfinancial assets unless and until the entity’s right to receive or retain the share-based noncash consideration is unconditional under Subtopic 610-20 in accordance with paragraph 610-20-15-3A.Certain Contracts on Debt and Equity Securities
815-10-25-17
Forward contracts and purchased options on debt securities within the scope of this Subsection (see the Certain Contracts on Debt and Equity Securities Subsection of Section 815-10-15) shall, at inception, be designated as held to maturity, available for sale, or trading in a manner consistent with the accounting prescribed by Topic 320 for debt securities. Such forward and option contracts are not eligible to be hedging instruments.
815-10-25-18
Forward contracts and purchased options on equity securities within the scope of this Subsection (see the Certain Contracts on Debt and Equity Securities Subsection of Section 815-10-15) shall, at inception, be recognized in a manner consistent with the accounting prescribed by Topic 321 for equity securities. Such forward and option contracts are not eligible to be hedging instruments.
815-10-30Initial Measurement
Source downloaded: .Record version d0889d37a8df. Effective date must be checked in the source.
815-10-30-1
All derivative instruments shall be measured initially at fair value.
Contract that Is a Derivative Instrument After Acquisition
815-10-30-3
A contract recognized under paragraph 815-10-25-2 because it meets the definition of a derivative instrument after acquisition by an entity shall be measured initially at its then-current fair value.
Forward Commitment Dollar Rolls
815-10-30-4
A forward commitment dollar roll that is not subject otherwise to this Subtopic's provisions shall be measured initially at fair value.
Certain Contracts on Debt and Equity Securities
815-10-30-6
Forward contracts and purchased options on equity securities within the scope of this Subsection shall be measured initially in a manner consistent with the accounting prescribed by Topic 321.
815-10-35Subsequent Measurement
Source downloaded: .Record version fff333ba5a92. Effective date must be checked in the source.
815-10-35-1
All derivative instruments shall be measured subsequently at fair value.
815-10-35-1A
As a practical expedient, a receive-variable, pay-fixed interest rate swap for which the simplified hedge accounting approach (see paragraphs for scope) is applied may be measured subsequently at settlement value instead of fair value.
815-10-35-1B
The primary difference between settlement value and fair value is that nonperformance risk is not considered in determining settlement value. One approach for estimating the receive-variable, pay-fixed interest rate swap's settlement value is to perform a present value calculation of the swap's remaining estimated cash flows using a valuation technique that is not adjusted for nonperformance risk.
815-10-35-1C
If any of the conditions in paragraph 815-20-25-131D for applying the simplified hedge accounting approach subsequently cease to be met or the relationship otherwise ceases to qualify for hedge accounting, the General Subsections of this Topic shall apply at the date of change and on a prospective basis. For example, if the related variable-rate borrowing is prepaid without terminating the receive-variable, pay-fixed interest rate swap, the gain or loss on the swap in accumulated other comprehensive income shall be reclassified to earnings in accordance with paragraphs with the swap measured at fair value on the date of change and subsequent changes in fair value reported in earnings in accordance with paragraph 815-10-35-2. Similarly, if the receive-variable, pay-fixed interest rate swap is terminated early without the related variable-rate borrowing being prepaid, the gain or loss on the swap in accumulated other comprehensive income shall be reclassified to earnings in accordance with paragraphs .
815-10-35-2
The accounting for changes in the fair value (that is, gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. Subtopic 815-20 discusses the accounting for the gain or loss on a derivative instrument that is designated as a hedging instrument. Except as noted in the following paragraph, the gain or loss on a derivative instrument not designated as a hedging instrument shall be recognized currently in earnings.
815-10-35-3
An entity that does not report earnings as a separate caption in a statement of financial performance (for example, a not-for-profit entity [NFP] or a defined benefit pension plan) shall recognize the gain or loss on a nonhedging derivative instrument as a change in net assets in the period of change.
Forward Commitment Dollar Rolls
815-10-35-4
A forward commitment dollar roll that is not subject otherwise to this Subtopic's provisions shall be measured subsequently at fair value.
Certain Contracts on Debt and Equity Securities
815-10-35-5
Forward contracts and purchased options on debt securities within the scope of this Subsection shall be measured subsequently according to their initial classification as follows:
- aHeld to maturity:
- 1Changes in the fair value of the forward contract or purchased option shall not be recognized. Credit losses on the underlying securities in a forward contract shall be recorded through an allowance for credit losses in accordance with Subtopic 326-20 on financial instruments measured at amortized cost. Credit losses on the underlying securities in a purchased option shall be recorded through an allowance for credit losses in accordance with Subtopic 326-20 and shall be limited by the amount of the option premium.
- 2Debt securities purchased under a forward contract shall be recorded at the forward contract price at the settlement date.
- 3Debt securities purchased by exercising an option shall be recorded at the option strike price plus any remaining carrying amount for the option premium at the exercise date.
- 4If an option expires worthless and the same debt security is purchased in the market, the security shall be recorded at its market price plus any remaining carrying amount for the option premium.
- 5If an entity does not take delivery under the forward contract or purchase the same security in the market if the option expires worthless, the entity's intent to hold other debt securities to maturity will be called into question.
- 1
- bAvailable for sale:
- 1Changes in the fair value of the forward contract or purchased option shall be recognized as part of the separate component of shareholders' equity under Topic 320 as they occur. Credit losses on the underlying securities in a forward contract shall be recorded through an allowance for credit losses in accordance with Subtopic 326-30 on measuring credit losses on available-for-sale debt securities. Credit losses on the underlying securities in a purchased option shall be recorded through an allowance for credit losses in accordance with Subtopic 326-30 and shall be limited by the amount of the option premium.
- 2Debt securities purchased under a forward contract shall be recorded at their fair values at the settlement date.
- 3Debt securities purchased by exercising an option shall be recorded at the option strike price plus the fair value of the option at the exercise date.
- 4If the option expires worthless and the same debt security is purchased in the market, the security shall be recorded at its market price plus any remaining carrying amount for the option premium.
- 1
- c
- 1Changes in the fair value of the forward contract or purchased option shall be recognized in earnings as they occur.
- 2Debt securities purchased under a forward contract or by exercising an option shall be recorded at their fair values at the settlement date.
- 1
815-10-35-6
Changes in the fair value of forward contracts and purchased options on equity securities within the scope of this Subsection shall be recognized in earnings as they occur. Changes in observable price or impairment of forward contracts and purchased options on equity securities without readily determinable fair value within the scope of this Subsection measured in accordance with paragraph 321-10-35-2 shall be recognized in earnings as they occur. A change in observable price or impairment of the underlying securities of forward contracts and purchased options on equity securities shall result in a remeasurement of the entire fair value of the forward contracts and purchased options as of the date that the observable transaction took place. Equity securities within the scope of this Subsection purchased under a forward contract or by exercising an option shall be recorded at their fair values at the settlement date.
815-10-40Derecognition
Source downloaded: .Record version 30d7175e9d5e. Effective date must be checked in the source.
815-10-40-1
Extinguishments of derivative instruments that are liabilities are addressed by paragraph 405-20-40-1. Transfers of derivative instruments that are financial assets are addressed by Section 860-10-40.
815-10-40-2
Transfers of assets that are derivative instruments and subject to the requirements of this Subtopic but that are not financial assets shall be accounted for by analogy to Subtopic 860-10. This guidance is limited to transfers of nonfinancial assets that are derivative instruments that are or will be subject to the requirements of this Subtopic. An example would be a transfer to another entity of a derivative instrument, such as a forward contract to purchase gold that requires physical settlement and is or will be subject to the requirements of this Subtopic.
815-10-40-3
If a derivative instrument has the potential to be both a nonfinancial asset and a nonfinancial liability (such as a commodity forward contract that is a nonfinancial derivative instrument), then, as described in paragraph 860-10-40-40, the criteria of both Sections 405-20-40 and 860-10-40 shall be met to qualify for derecognition.
815-10-45Other Presentation Matters
Source downloaded: .Record version faab4f8b9234. Effective date must be checked in the source.
Balance Sheet—Netting
815-10-45-1
Subtopic 210-20 establishes the criteria for offsetting amounts in the balance sheet.
815-10-45-2
None of the provisions in this Subtopic support netting a hedging derivative's asset (or liability) position against the hedged liability (or asset) position in the balance sheet.
815-10-45-3
The following guidance addresses offsetting certain amounts related to derivative instruments. For purposes of this guidance, derivative instruments include those that meet the definition of a derivative instrument but are not included in the scope of this Subtopic.
815-10-45-5
In accordance with paragraph 210-20-45-1, but without regard to the condition in paragraph 210-20-45-1(c), a reporting entity may offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) recognized at fair value executed with the same counterparty under a master netting arrangement. Solely as it relates to the right to reclaim cash collateral or the obligation to return cash collateral, fair value amounts include amounts that approximate fair value. The preceding sentence shall not be analogized to for any other asset or liability. The fair value recognized for some contracts may include an accrual component for the periodic unconditional receivables and payables that result from the contract; the accrual component included therein may also be offset for contracts executed with the same counterparty under a master netting arrangement. A master netting arrangement exists if the reporting entity has multiple contracts, whether for the same type of derivative instrument or for different types of derivative instruments, with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract.
815-10-45-6
A reporting entity shall make an accounting policy decision to offset fair value amounts pursuant to the preceding paragraph. The reporting entity's choice to offset or not must be applied consistently. A reporting entity shall not offset fair value amounts recognized for derivative instruments without offsetting fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. A reporting entity that makes an accounting policy decision to offset fair value amounts recognized for derivative instruments pursuant to the preceding paragraph but determines that the amount recognized for the right to reclaim cash collateral or the obligation to return cash collateral is not a fair value amount shall continue to offset the derivative instruments.
815-10-45-7
A reporting entity that has made an accounting policy decision to offset fair value amounts is not permitted to offset amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against net derivative instrument positions if those amounts either:
- a Were not fair value amounts
- b Arose from instruments in a master netting arrangement that are not eligible to be offset.
Income Statement Classification
815-10-45-8
Except for the guidance in the following paragraph and paragraph 815-10-45-10, this Subtopic does not provide guidance about the classification in the income statement of a derivative instrument's gains or losses, including the adjustment to fair value for a contract that newly meets the definition of a derivative instrument.
815-10-45-9
Gains and losses (realized and unrealized) on all derivative instruments within the scope of this Subtopic shall be shown net when recognized in the income statement, whether or not settled physically, if the derivative instruments are held for trading purposes. On an ongoing basis, reclassifications into and out of trading shall be rare.
815-10-45-10
Subsequent changes in the fair value of an option that was granted to a grantee and is subject to or became subject to this Subtopic shall be included in the determination of net income. (See paragraphs 815-10-55-46 through 55-48A and for discussion of such an option.) Changes in fair value of the option award before vesting shall be characterized as compensation cost in the grantor's income statement. Changes in fair value of the option award after vesting may be reflected elsewhere in the grantor's income statement.
Cash Flow Statement Classification
815-10-45-11
An instrument accounted for as a derivative instrument under this Subtopic that, at its inception, includes off-market terms, or requires an up-front cash payment, or both often contains a financing element. Identifying a financing element within a derivative instrument is a matter of judgment that depends on facts and circumstances.
815-10-45-12
If an other-than-insignificant financing element is present at inception—other than a financing element inherently included in an at-the-market derivative instrument with no prepayments (that is, the forward points in an at-the-money forward contract)—then the borrower shall report all cash inflows and outflows associated with that derivative instrument in a manner consistent with financing activities as described in paragraphs .
815-10-45-13
An at-the-money plain-vanilla interest rate swap that involves no payments between the parties at inception would not be considered as having a financing element present at inception even though, due to the implicit forward rates derived from the yield curve, the parties to the contract have an expectation that the comparison of the fixed and variable legs will result in payments being made by one party in the earlier periods and being made by the counterparty in the later periods of the swap's term.
815-10-45-14
If a derivative instrument is an at-the-money or out-of-the-money option contract or contains an at-the-money or out-of-the-money option contract, a payment made at inception to the writer of the option for the option's time value by the counterparty shall not be viewed as evidence that the derivative instrument contains a financing element.
815-10-45-15
In contrast, if the contractual terms of a derivative instrument have been structured to ensure that net payments will be made by one party in the earlier periods and subsequently returned by the counterparty in the later periods of the derivative instrument's term, that derivative instrument shall be viewed as containing a financing element even if the derivative instrument has a fair value of zero at inception.
815-10-50Disclosure
Source downloaded: .Record version 89738863c8b2. Effective date must be checked in the source.
815-10-50-1
An entity with derivative instruments(or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose information to enable users of the financial statements to understand all of the following:
- aHow and why an entity uses derivative instruments (or such nonderivative instruments)
- bHow derivative instruments (or such nonderivative instruments) and related hedged items are accounted for under Topic 815
- cHow derivative instruments (or such nonderivative instruments) and related hedged items affect all of the following:
- 1An entity's financial position
- 2An entity's financial performance
- 3An entity's cash flows.
- 1
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1An entity with derivative instruments(or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose information to enable users of the financial statements to understand all of the following in interim and annual reporting periods:- aHow and why an entity uses derivative instruments (or such nonderivative instruments)
- bHow derivative instruments (or such nonderivative instruments) and related hedged items are accounted for under Topic 815
- cHow derivative instruments (or such nonderivative instruments) and related hedged items affect all of the following:
- 1An entity's financial position
- 2An entity's financial performance
- 3An entity's cash flows.
- 1
815-10-50-1A
An entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position and statement of financial performance are presented:
- aIts objectives for holding or issuing those instruments
- bThe context needed to understand those objectives
- cIts strategies for achieving those objectives
- dInformation that would enable users of its financial statements to understand the volume of its activity in those instruments.
815-10-50-1B
For item (d) in paragraph 815-10-50-1A, an entity shall select the format and the specifics of disclosures relating to its volume of such activity that are most relevant and practicable for its individual facts and circumstances. Information about the instruments in items (a) through (c) in paragraph 815-10-50-1A shall be disclosed in the context of each instrument's primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, interest rate and foreign exchange rate, or overall price). Further, those instruments shall be distinguished between those used for risk management purposes and those used for other purposes. Derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) used for risk management purposes include those designated as hedging instruments under Subtopic 815-20 as well as those used as economic hedges and for other purposes related to the entity's risk exposures.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For item (d) in paragraph 815-10-50-1A, an entity shall select the format and the specifics of disclosures relating to its volume of such activity that are most relevant and practicable for its individual facts and circumstances. Information about the instruments in items (a) through (c) in paragraph 815-10-50-1A shall be disclosed in the context of each instrument's primary underlying risk exposure (for example, interest rate, credit, foreign exchange rate, interest rate and foreign exchange rate, or overall price) in interim and annual reporting periods. Further, those instruments shall be distinguished between those used for risk management purposes and those used for other purposes. Derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) used for risk management purposes include those designated as hedging instruments under Subtopic 815-20 as well as those used as economic hedges and for other purposes related to the entity's risk exposures. 815-10-50-2
The instruments addressed by items (a) through (c) in paragraph 815-10-50-1A shall be distinguished between each of the following:
- aDerivative instruments (and nonderivative instruments as noted in items (1)(i) and (1)(iii) of this paragraph) used for risk management purposes, distinguished between each of the following:
- 1Derivative instruments (and nonderivative instruments) designated as hedging instruments, distinguished between each of the following:
- iDerivative instruments (and nonderivative instruments) designated as fair value hedging instruments
- iiDerivative instruments designated as cash flow hedging instruments
- iiiDerivative instruments (and nonderivative instruments) designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation.
- i
- 2Derivative instruments used as economic hedges and for other purposes related to the entity's risk exposures.
- 1
- bDerivative instruments used for other purposes.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, the instruments addressed by items (a) through (c) in paragraph 815-10-50-1A shall be distinguished between each of the following: - aDerivative instruments (and nonderivative instruments as noted in items (1)(i) and (1)(iii) of this paragraph) used for risk management purposes, distinguished between each of the following:
- 1Derivative instruments (and nonderivative instruments) designated as hedging instruments, distinguished between each of the following:
- iDerivative instruments (and nonderivative instruments) designated as fair value hedging instruments
- iiDerivative instruments designated as cash flow hedging instruments
- iiiDerivative instruments (and nonderivative instruments) designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation.
- i
- 2Derivative instruments used as economic hedges and for other purposes related to the entity's risk exposures.
- 1
- bDerivative instruments used for other purposes.
815-10-50-3
If the simplified hedge accounting approach (see paragraphs ) is applied in accounting for a qualifying receive-variable, pay-fixed interest rate swap, the settlement value of that swap may be used in place of fair value when disclosing the information required by this Section or in providing other fair value disclosures, such as those required under Topic 820 on fair value. For the purposes of complying with these disclosure requirements, amounts disclosed at settlement value will be subject to all of the same disclosure requirements as amounts disclosed at fair value. Any amounts disclosed at settlement value shall be clearly stated as such and disclosed separately from amounts disclosed at fair value.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1If the simplified hedge accounting approach (see paragraphs ) is applied in accounting for a qualifying receive-variable, pay-fixed interest rate swap, the settlement value of that swap may be used in place of fair value when disclosing the information required by this Section or in providing other fair value disclosures, such as those required under Topic 820 on fair value. For the purposes of complying with these disclosure requirements, amounts disclosed at settlement value will be subject to all of the same disclosure requirements as amounts disclosed at fair value. Any amounts disclosed at settlement value shall be clearly stated as such and disclosed separately from amounts disclosed at fair value in interim and annual reporting periods.815-10-50-4
For derivative instruments not designated as hedging instruments under Subtopic 815-20, the description shall indicate the purpose of the derivative activity.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For derivative instruments not designated as hedging instruments under Subtopic 815-20, the description shall indicate the purpose of the derivative activity in interim and annual reporting periods.Overall Quantitative Disclosures
815-10-50-4A
An entity that holds or issues derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position and statement of financial performance are presented:
- aThe location and fair value amounts of derivative instruments (and such nonderivative instruments) reported in the statement of financial position
- bThe location and amount of the gains and losses on derivative instruments (and such nonderivative instruments) and related hedged items reported in any of the following:
- 1The statement of financial performance
- 2The statement of financial position (for example, gains and losses initially recognized in other comprehensive income).
- 1
- cThe total amount of each income and expense line item presented in the statement of financial performance in which the results of fair value or cash flow hedges are recorded.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
220-40-65-1An entity that holds or issues derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position and statement of financial performance are presented:- aThe location and fair value amounts of derivative instruments (and such nonderivative instruments) reported in the statement of financial position
- bThe location and amount of the gains and losses on derivative instruments (and such nonderivative instruments) and related hedged items reported in any of the following:
- 1The statement of financial performance
- 2The statement of financial position (for example, gains and losses initially recognized in other comprehensive income).
- 1
- cThe total amount of each income and expense line item presented in the statement of financial performance in which the results of fair value or cash flow hedges are recorded.
See paragraphs for additional disclosure requirements.
815-10-50-4B
The disclosures required by item (a) in paragraph 815-10-50-4A shall comply with all of the following:
- aThe fair value of derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall be presented on a gross basis, even when those instruments are subject to master netting arrangements and qualify for net presentation in the statement of financial position in accordance with Subtopic 210-20 or paragraphs , as applicable.
- bCash collateral payables and receivables associated with those instruments shall not be added to or netted against the fair value amounts.
- cFair value amounts shall be presented as separate asset and liability values segregated between each of the following:
- 1Those instruments designated and qualifying as hedging instruments under Subtopic 815-20, presented separately by type of contract (for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts, and so forth)
- 2Those instruments not designated as hedging instruments, presented separately by type of contract.
- 1
- dThe disclosure shall identify the line item(s) in the statement of financial position in which the fair value amounts for these categories of derivative instruments are included.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1The disclosures required by item (a) in paragraph 815-10-50-4A shall comply with all of the following in interim and annual reporting periods:- aThe fair value of derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall be presented on a gross basis, even when those instruments are subject to master netting arrangements and qualify for net presentation in the statement of financial position in accordance with Subtopic 210-20 or paragraphs , as applicable.
- bCash collateral payables and receivables associated with those instruments shall not be added to or netted against the fair value amounts.
- cFair value amounts shall be presented as separate asset and liability values segregated between each of the following:
- 1Those instruments designated and qualifying as hedging instruments under Subtopic 815-20, presented separately by type of contract (for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts, other contracts, and so forth)
- 2Those instruments not designated as hedging instruments, presented separately by type of contract.
- 1
- dThe disclosure shall identify the line item(s) in the statement of financial position in which the fair value amounts for these categories of derivative instruments are included.
815-10-50-4C
For qualifying fair value and cash flow hedges, the gains and losses disclosed pursuant to paragraph 815-10-50-4A(b) shall be presented separately for all of the following by type of contract (as discussed in paragraph 815-10-50-4D) and by income and expense line item (if applicable):
- aDerivative instruments (and nonderivative instruments) designated and qualifying as hedging instruments in fair value hedges and related hedged items designated and qualifying in fair value hedges.
- bThe gains and losses on derivative instruments designated and qualifying in cash flow hedges included in the assessment of effectiveness that were recognized in other comprehensive income during the current period.
- bbAmounts excluded from the assessment of effectiveness that were recognized in other comprehensive income during the period for which an amortization approach is applied in accordance with paragraph 815-20-25-83A.
- cThe gains and losses on derivative instruments designated and qualifying in cash flow hedges that are included in the assessment of effectiveness and recorded in accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period.
- dThe portion of gains and losses on derivative instruments designated and qualifying in fair value and cash flow hedges representing the amount, if any, excluded from the assessment of hedge effectiveness that is recognized in earnings. When disclosing this amount, an entity shall disclose separately amounts that are recognized in earnings through an amortization approach in accordance with paragraph 815-20-25-83A and amounts recognized through changes in fair value in earnings in accordance with paragraph 815-20-25-83B.
- 1
- 2
- e
- fThe gains and losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it is probable that the original forecasted transactions will not occur by the end of the originally specified time period or within the additional period of time discussed in paragraphs .
- gThe amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For qualifying fair value and cash flow hedges, the gains and losses disclosed pursuant to paragraph 815-10-50-4A(b) shall be presented separately for all of the following by type of contract (as discussed in paragraph 815-10-50-4D) and by income and expense line item (if applicable) in interim and annual reporting periods:- aDerivative instruments (and nonderivative instruments) designated and qualifying as hedging instruments in fair value hedges and related hedged items designated and qualifying in fair value hedges.
- bThe gains and losses on derivative instruments designated and qualifying in cash flow hedges included in the assessment of effectiveness that were recognized in other comprehensive income during the current period.
- bbAmounts excluded from the assessment of effectiveness that were recognized in other comprehensive income during the period for which an amortization approach is applied in accordance with paragraph 815-20-25-83A.
- cThe gains and losses on derivative instruments designated and qualifying in cash flow hedges that are included in the assessment of effectiveness and recorded in accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period.
- dThe portion of gains and losses on derivative instruments designated and qualifying in fair value and cash flow hedges representing the amount, if any, excluded from the assessment of hedge effectiveness that is recognized in earnings. When disclosing this amount, an entity shall disclose separately amounts that are recognized in earnings through an amortization approach in accordance with paragraph 815-20-25-83A and amounts recognized through changes in fair value in earnings in accordance with paragraph 815-20-25-83B.
- 1
- 2
- e
- fThe gains and losses reclassified into earnings as a result of the discontinuance of cash flow hedges because it is probable that the original forecasted transactions will not occur by the end of the originally specified time period or within the additional period of time discussed in paragraphs .
- gThe amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge.
815-10-50-4CC
An entity shall present separately by type of contract (as discussed in paragraph 815-10-50-4D) the gains and losses disclosed in accordance with paragraph 815-10-50-4A(b) for derivative instruments not designated or qualifying as hedging instruments under Topic 815 (see paragraph 815-10-50-4F).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an entity shall present separately by type of contract (as discussed in paragraph 815-10-50-4D) the gains and losses disclosed in accordance with paragraph 815-10-50-4A(b) for derivative instruments not designated or qualifying as hedging instruments under Topic 815 (see paragraph 815-10-50-4F).815-10-50-4CCC
For qualifying net investment hedges, an entity shall present the gains and losses disclosed in accordance with paragraph 815-10-50-4A(b) separately for all of the following by type of contract (as discussed in paragraph 815-10-50-4D):
- aThe gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges that were recognized in the cumulative translation adjustment section of other comprehensive income during the current period
- bThe gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges recorded in the cumulative translation adjustment section of accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period
- cThe portion of gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges representing the amount, if any, excluded from the assessment of hedge effectiveness.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For qualifying net investment hedges, an entity shall present the gains and losses disclosed in accordance with paragraph 815-10-50-4A(b) separately for all of the following by type of contract (as discussed in paragraph 815-10-50-4D)in interim and annual reporting periods:- aThe gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges that were recognized in the cumulative translation adjustment section of other comprehensive income during the current period
- bThe gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges recorded in the cumulative translation adjustment section of accumulated other comprehensive income during the term of the hedging relationship and reclassified into earnings during the current period
- cThe portion of gains and losses on derivative instruments (and nonderivative instruments) designated and qualifying in net investment hedges representing the amount, if any, excluded from the assessment of hedge effectiveness.
815-10-50-4D
Disclosures pursuant to paragraphs 815-10-50-4C through 50-4CCC shall both:
- aBe presented separately by type of contract, for example:
- 1Interest rate contracts
- 2Foreign exchange contracts
- 3Equity contracts
- 4Commodity contracts
- 5Credit contracts
- 6Other contracts.
- 1
- bIdentify the line item(s) in the statement of financial performance in which the gains and losses for these categories of derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) are included.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, disclosures pursuant to paragraphs 815-10-50-4C through 50-4CCC shall both:- aBe presented separately by type of contract, for example:
- 1Interest rate contracts
- 2Foreign exchange contracts
- 3Equity contracts
- 4Commodity contracts
- 5Credit contracts
- 6Other contracts.
- 1
- bIdentify the line item(s) in the statement of financial performance in which the gains and losses for these categories of derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) are included.
815-10-50-4E
The quantitative disclosures required by paragraphs 815-10-50-4A through 50-4CCC shall be presented in tabular format.If a proportion of a derivative instrument is designated and qualifying as a hedging instrument and a proportion is not designated and qualifying as a hedging instrument, an entity shall allocate the related amounts to the appropriate categories within the disclosure tables. Example 21 (see paragraph 815-10-55-182) illustrates the disclosures described in paragraphs .
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, the quantitative disclosures required by paragraphs 815-10-50-4A through 50-4CCC shall be presented in tabular format.If a proportion of a derivative instrument is designated and qualifying as a hedging instrument and a proportion is not designated and qualifying as a hedging instrument, an entity shall allocate the related amounts to the appropriate categories within the disclosure tables. Example 21 (see paragraph 815-10-55-182) illustrates the disclosures described in paragraphs .815-10-50-4EE
An entity shall disclose in tabular format the following for items designated and qualifying as hedged items in fair value hedges:
- aThe carrying amount of hedged assets and liabilities recognized in the statement of financial position. For an available-for-sale debt security, the amount disclosed is the amortized cost basis.
- bThe cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized in the statement of financial position.
- cThe line item in the statement of financial position that includes the hedged assets and liabilities.
- dThe cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, an entity shall disclose in tabular format the following for items designated and qualifying as hedged items in fair value hedges:- aThe carrying amount of hedged assets and liabilities recognized in the statement of financial position. For an available-for-sale debt security, the amount disclosed is the amortized cost basis.
- bThe cumulative amount of fair value hedging adjustments to hedged assets and liabilities included in the carrying amount of the hedged assets and liabilities recognized in the statement of financial position.
- cThe line item in the statement of financial position that includes the hedged assets and liabilities.
- dThe cumulative amount of fair value hedging adjustments remaining for any hedged assets and liabilities for which hedge accounting has been discontinued.
815-10-50-4EEE
For each line item disclosed in accordance with paragraph 815-10-50-4EE(c) that includes hedging relationships designated under the portfolio layer method in accordance with paragraph 815-20-25-12A, the following information shall be disclosed separately:
- aThe amortized cost basis of the closed portfolio(s) of financial assets or the beneficial interest(s)
- b
- cThe basis adjustment associated with the hedged item(s) (that is, the hedged layer or layers).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For each line item disclosed in accordance with paragraph 815-10-50-4EE(c) that includes hedging relationships designated under the portfolio layer method in accordance with paragraph 815-20-25-12A, the following information shall be disclosed separately in interim and annual reporting periods:- aThe amortized cost basis of the closed portfolio(s) of financial assets or the beneficial interest(s)
- b
- cThe basis adjustment associated with the hedged item(s) (that is, the hedged layer or layers).
815-10-50-4EEEE
If an entity elects to record changes in the fair value of amounts excluded from the assessment of effectiveness currently in earnings in accordance with paragraph 815-20-25-83B, the entity shall disclose this election in its summary of significant accounting policies.
815-10-50-4F
For derivative instruments that are not designated or qualifying as hedging instruments under Subtopic 815-20, if an entity's policy is to include those derivative instruments in its trading activities (for example, as part of its trading portfolio that includes both derivative instruments and nonderivative or cash instruments), the entity can elect to not separately disclose gains and losses as required by paragraph 815-10-50-4CC provided that the entity discloses all of the following:
- aThe gains and losses on its trading activities (including both derivative instruments and nonderivative instruments) recognized in the statement of financial performance, separately by major types of items, for example:
- 1Fixed income/interest rates
- 2Foreign exchange
- 3Equity
- 4Commodity
- 5Credit.
- 1
- bThe line items in the statement of financial performance in which trading activities gains and losses are included
- cA description of the nature of its trading activities and related risks, and how the entity manages those risks.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For derivative instruments that are not designated or qualifying as hedging instruments under Subtopic 815-20, if an entity's policy is to include those derivative instruments in its trading activities (for example, as part of its trading portfolio that includes both derivative instruments and nonderivative or cash instruments), the entity can elect to not separately disclose gains and losses as required by paragraph 815-10-50-4CC provided that the entity discloses all of the following in interim and annual reporting periods: - aThe gains and losses on its trading activities (including both derivative instruments and nonderivative instruments) recognized in the statement of financial performance, separately by major types of items, for example:
- 1Fixed income/interest rates
- 2Foreign exchange
- 3Equity
- 4Commodity
- 5Credit.
- 1
- bThe line items in the statement of financial performance in which trading activities gains and losses are included
- cA description of the nature of its trading activities and related risks, and how the entity manages those risks.
815-10-50-4G
For purposes of the disclosure requirements beginning in paragraph 815-10-50-4A, not-for-profit entities within the scope of Topic 954 should present a similarly formatted table. Those entities shall refer to amounts within their performance indicator, instead of in income, and amounts outside their performance indicator, instead of in other comprehensive income. Not-for-profit entities not within the scope of Topic 954 shall disclose the gain or loss recognized in changes in net assets using a similar format. All not-for-profit entities also would indicate which class or classes of net assets (without donor restrictions or with donor restrictions) are affected.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For purposes of the disclosure requirements beginning in paragraph 815-10-50-4A, not-for-profit entities within the scope of Topic 954 should present a similarly formatted table. Those entities shall refer to amounts within their performance indicator, instead of in income, and amounts outside their performance indicator, instead of in other comprehensive income. Not-for-profit entities not within the scope of Topic 954 shall disclose the gain or loss recognized in changes in net assets using a similar format. All not-for-profit entities also would indicate which class or classes of net assets (without donor restrictions or with donor restrictions) are affected. The disclosures in this paragraph are required in interim and annual reporting periods.Credit-Risk-Related Contingent Features
815-10-50-4H
An entity that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) shall disclose all of the following for every annual and interim reporting period for which a statement of financial position is presented:
- aThe existence and nature of credit-risk-related contingent features
- bThe circumstances in which credit-risk-related contingent features could be triggered in derivative instruments (or such nonderivative instruments) that are in a net liability position at the end of the reporting period
- cThe aggregate fair value amounts of derivative instruments (or such nonderivative instruments) that contain credit-risk-related contingent features that are in a net liability position at the end of the reporting period
- dThe aggregate fair value of assets that are already posted as collateral at the end of the reporting period
- eThe aggregate fair value of additional assets that would be required to be posted as collateral if the credit-risk-related contingent features were triggered at the end of the reporting period
- fThe aggregate fair value of assets needed to settle the instrument immediately if the credit-risk-related contingent features were triggered at the end of the reporting period.
Information in More than One Note
815-10-50-4I
If information on derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) is disclosed in more than a single note to financial statements, an entity shall cross-reference from the derivative instruments (or nonderivative instruments) note to other notes in which derivative-instrument-related information is disclosed.
Credit Derivatives
815-10-50-4J
For purposes of the following paragraph, the term seller (sometimes referred to as a writer of the contract) refers to the party that assumes credit risk, which could be either:
- aA guarantor in a guarantee type contract
- bAny party that provides the credit protection in an option type contract, a credit default swap, or any other credit derivative contract.
815-10-50-4K
A seller of credit derivatives shall disclose information about its credit derivatives and hybrid instruments (for example, a credit-linked note) that have embedded credit derivativesto enable users of financial statements to assess their potential effect on its financial position, financial performance, and cash flows. Specifically, for each statement of financial position presented, the seller of a credit derivative shall disclose all of the following information for each credit derivative, or each group of similar credit derivatives, even if the likelihood of the seller's having to make any payments under the credit derivative is remote:
- aThe nature of the credit derivative, including all of the following:
- 1The approximate term of the credit derivative
- 2The reason(s) for entering into the credit derivative
- 3The events or circumstances that would require the seller to perform under the credit derivative
- 4The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the credit derivative, which could be based on either recently issued external credit ratings or current internal groupings used by the seller to manage its risk
- 5If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
- 1
- bAll of the following information about the maximum potential amount of future payments under the credit derivative:
- 1The maximum potential amount of future payments (undiscounted) that the seller could be required to make under the credit derivative, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the credit derivative (which are addressed in items (c) through (f))
- 2The fact that the terms of the credit derivative provide for no limitation to the maximum potential future payments under the contract, if applicable
- 3If the seller is unable to develop an estimate of the maximum potential amount of future payments under the credit derivative, the reasons why it cannot estimate the maximum potential amount.
- 1
- cThe fair value of the credit derivative as of the date of the statement of financial position
- dThe nature of any recourse provisions that would enable the seller to recover from third parties any of the amounts paid under the credit derivative
- eThe nature of any assets held either as collateral or by third parties that, upon the occurrence of any specified triggering event or condition under the credit derivative, the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative
- fIf estimable, the approximate extent to which the proceeds from liquidation of assets held either as collateral or by third parties would be expected to cover the maximum potential amount of future payments under the credit derivative. In its estimate of potential recoveries, the seller of credit protection shall consider the effect of any purchased credit protection with identical underlying(s).
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, a seller of credit derivatives shall disclose information about its credit derivatives and hybrid instruments (for example, a credit-linked note) that have embedded credit derivativesto enable users of financial statements to assess their potential effect on its financial position, financial performance, and cash flows. Specifically, for each statement of financial position presented, the seller of a credit derivative shall disclose all of the following information for each credit derivative, or each group of similar credit derivatives, even if the likelihood of the seller's having to make any payments under the credit derivative is remote:- aThe nature of the credit derivative, including all of the following:
- 1The approximate term of the credit derivative
- 2The reason(s) for entering into the credit derivative
- 3The events or circumstances that would require the seller to perform under the credit derivative
- 4The current status (that is, as of the date of the statement of financial position) of the payment/performance risk of the credit derivative, which could be based on either recently issued external credit ratings or current internal groupings used by the seller to manage its risk
- 5If the entity uses internal groupings for purposes of item (a)(4), how those groupings are determined and used for managing risk.
- 1
- bAll of the following information about the maximum potential amount of future payments under the credit derivative:
- 1The maximum potential amount of future payments (undiscounted) that the seller could be required to make under the credit derivative, which shall not be reduced by the effect of any amounts that may possibly be recovered under recourse or collateralization provisions in the credit derivative (which are addressed in items (c) through (f))
- 2The fact that the terms of the credit derivative provide for no limitation to the maximum potential future payments under the contract, if applicable
- 3If the seller is unable to develop an estimate of the maximum potential amount of future payments under the credit derivative, the reasons why it cannot estimate the maximum potential amount.
- 1
- cThe fair value of the credit derivative as of the date of the statement of financial position
- dThe nature of any recourse provisions that would enable the seller to recover from third parties any of the amounts paid under the credit derivative
- eThe nature of any assets held either as collateral or by third parties that, upon the occurrence of any specified triggering event or condition under the credit derivative, the seller can obtain and liquidate to recover all or a portion of the amounts paid under the credit derivative
- fIf estimable, the approximate extent to which the proceeds from liquidation of assets held either as collateral or by third parties would be expected to cover the maximum potential amount of future payments under the credit derivative. In its estimate of potential recoveries, the seller of credit protection shall consider the effect of any purchased credit protection with identical underlying(s).
815-10-50-4L
One way to present the information required by paragraph 815-10-50-4K for groups of similar credit derivatives would be first to segregate the disclosures by major types of contracts (for example, single-name credit default swaps, traded indexes, other portfolio products, and swaptions) and then, for each major type, provide additional subgroups for major types of referenced (or underlying) asset classes (for example, corporate debt, sovereign debt, and structured finance). With respect to hybrid instruments that have embedded credit derivatives, the seller of the embedded credit derivative shall disclose the information required by paragraph 815-10-50-4K for the entire hybrid instrument, not just the embedded credit derivatives.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1One way to present the information required by paragraph 815-10-50-4K for groups of similar credit derivatives would be first to segregate the disclosures by major types of contracts (for example, single-name credit default swaps, traded indexes, other portfolio products, and swaptions) and then, for each major type, provide additional subgroups for major types of referenced (or underlying) asset classes (for example, corporate debt, sovereign debt, and structured finance). With respect to hybrid instruments that have embedded credit derivatives, the seller of the embedded credit derivative shall disclose the information required by paragraph 815-10-50-4K for the entire hybrid instrument, not just the embedded credit derivatives. The disclosures in this paragraph are required in interim and annual reporting periods. Qualitative Disclosures
815-10-50-5
Qualitative disclosures about an entity's objectives and strategies for using derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) may be more meaningful if such objectives and strategies are described in the context of an entity's overall risk exposures relating to all of the following:
- aInterest rate risk
- bForeign exchange risk
- cCommodity price risk
- dCredit risk
- eEquity price risk.
815-10-50-5A
The quantitative disclosures about derivative instruments may be more useful, and less likely to be perceived to be out of context or otherwise misunderstood, if similar information is disclosed about other financial instruments or nonfinancial assets and liabilities to which the derivative instruments are related by activity. Accordingly, in those situations, an entity is encouraged, but not required, to present a more complete picture of its activities by disclosing that information.
Basis Adjustment Considerations under the Portfolio Layer Method
815-10-50-5B
For existing hedging relationships designated under the portfolio layer method, an entity shall not disclose the basis adjustment on a more disaggregated basis than the portfolio layer method closed portfolio to meet the objectives of disclosure requirements in other Topics unless that disaggregation is required in accordance with paragraph 815-20-45-4. After an entity allocates a basis adjustment in accordance with paragraph 815-20-45-4 (if applicable), if other Topics require the disclosure of the amortized cost basis of assets included in the closed portfolio on a basis that requires disaggregating the assets included in the closed portfolio, the entity shall exclude the portfolio layer method basis adjustment from the amortized cost basis of those assets. In that case, the entity shall disclose the total amount of the portfolio layer method basis adjustment excluded from the amortized cost basis of the assets included in the closed portfolio.
815-10-50-5C
For hedging relationships designated under the portfolio layer method, if the outstanding amount of the closed portfolio is less than the hedged layer or layers in accordance with paragraph 815-25-40-8(b) (that is, a breach occurred), an entity shall disclose:
- aThe amount of the hedge basis adjustment recognized in current-period interest income because of the breach
- bThe circumstances that led to the breach.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For hedging relationships designated under the portfolio layer method, if the outstanding amount of the closed portfolio is less than the hedged layer or layers in accordance with paragraph 815-25-40-8(b) (that is, a breach occurred), an entity shall disclose in interim and annual reporting periods the following:- aThe amount of the hedge basis adjustment recognized in current-period interest income because of the breach
- bThe circumstances that led to the breach.
Unconditional Purchase Obligations
815-10-50-6
If an unconditional purchase obligation is subject to the requirements of both Topic 440 and this Subtopic, the entity shall comply with both sets of disclosure requirements, including paragraph 440-10-50-4. For example, a power purchase agreement entered into in connection with the financing of a generation facility subject to the disclosure requirements of Topic 440 may also meet the definition of derivative instrument in paragraphs and is accounted for as a derivative instrument at fair value in the balance sheet.
Balance Sheet Offsetting
815-10-50-7
A reporting entity's accounting policy to offset or not offset in accordance with paragraph 815-10-45-6 shall be disclosed.
815-10-50-7A
A reporting entity also shall disclose the information required by paragraphs for all recognized derivative instruments accounted for in accordance with Topic 815, including bifurcated embedded derivatives, which are either:
- a
- bSubject to an enforceable master netting arrangement or similar agreement.
815-10-50-8
A reporting entity shall disclose the amounts recognized at the end of each reporting period for the right to reclaim cash collateral or the obligation to return cash collateral as follows:
- aA reporting entity that has made an accounting policy decision to offset fair value amounts shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral that have been offset against net derivative positions in accordance with paragraph 815-10-45-5.
- bA reporting entity shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements that have not been offset against net derivative instrument positions.
- cA reporting entity that has made an accounting policy decision to not offset fair value amounts shall separately disclose the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements.
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
270-10-65-1For interim and annual reporting periods, a reporting entity shall disclose the amounts recognized at the end of each reporting period for the right to reclaim cash collateral or the obligation to return cash collateral as follows: - aA reporting entity that has made an accounting policy decision to offset fair value amounts shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral that have been offset against net derivative positions in accordance with paragraph 815-10-45-5.
- bA reporting entity shall separately disclose amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements that have not been offset against net derivative instrument positions.
- cA reporting entity that has made an accounting policy decision to not offset fair value amounts shall separately disclose the amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting arrangements.
Convertible Securities
815-10-50-8A
For guidance on disclosures of information about derivative instrument transactions entered into in connection with the issuance of the convertible securities, see paragraph 470-20-50-1I for convertible debt instruments and paragraph 505-10-50-18 for convertible preferred stock.
Accounting Policy for Statement of Cash Flows
815-10-50-8C
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7See paragraph 230-10-50-9 for disclosure requirements related to where cash flows associated with derivative instruments and their related gains and losses are presented in the statement of cash flows. Certain Contracts on Debt and Equity Securities
815-10-50-9
An entity shall disclose its accounting policy for the premium paid (time value) to acquire an option that is classified as held to maturity or available for sale.
815-10-55Implementation Guidance and Illustrations
Source downloaded: .Record version 083fc7a3b5da. Effective date must be checked in the source.
Implementation Guidance
815-10-55-1
This Section provides guidance on the following implementation matters:
- aDetermining whether a contract is within the scope of this Subtopic
- bUnit of accounting—a transferable option is considered freestanding, not embedded
- cDefinition of derivative instrument
- dInstruments not within scope
- eScope application to certain contracts
- fOther presentation matters
- gSynthetic guaranteed investment contracts.
- h
815-10-55-2
The following diagram depicts the process for determining whether a freestanding contract is within the scope of this Subtopic. The diagram is a visual supplement to the written standards Sections. It shall not be interpreted to alter any requirements of this Subtopic or be considered a substitute for the requirements. The relevant paragraphs are identified in the parenthetical note after the question.
The following diagram depicts the process for determining whether a freestanding contract is within the scope of this Subtopic. The diagram is a visual supplement to the written standards Sections. It shall not be interpreted to alter any requirements of this Subtopic nor shall it be considered a substitute for the requirements. The relevant paragraphs are identified in the parenthetical note after the question.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8| Editor's Note: The content of paragraph 815-10-55-2 will change upon transition, together with a change in the heading noted below. |
| • > Determining Whether a Contract Is within the Scope of This Subtopic |
815-10-55-3
Certain structured transactions involving the issuance of a bond incorporate transferable options to call or put the bond. As such, those options are potentially exercisable by a party other than the debtor or the investor. For example, certain put bond structures involving three separate parties—the debtor, the investor, and an investment bank—may incorporate options that are ultimately held by the investment bank, giving that party the right to call the bond from the investor. For example, a call option that is transferable either by the debtor to a third party and thus is potentially exercisable by a party other than the debtor or by the original investor based on the legal agreements governing the debt issuance can result in the investor having different counterparties for the option and the original debt instrument. Accordingly, even if incorporated into the terms of the original debt agreement, such an option may not be considered an embedded derivative by either the debtor or the investor because it can be separated from the bond and effectively sold to a third party.
815-10-55-4
This guidance addresses the following matters:
- aNotional amount—identifying a commodity contract's notional amount
- bInitial net investment—initial exchange under currency swap not an initial net investment
- cNet settlement.
815-10-55-5
Many commodity contracts specify a fixed number of units of a commodity to be bought or sold under the pricing terms of the contract (for example, a fixed price). However, some contracts do not specify a fixed number of units. For example, consider the following four contracts that require one party to buy the following indicated quantities:
- aContract 1: As many units as required to satisfy its actual needs (that is, to be used or consumed) for the commodity during the period of the contract (a requirements contract). The party is not permitted to buy more than its actual needs (for example, the party cannot buy excess units for resale).
- bContract 2: Only as many units as needed to satisfy its actual needs up to a maximum of 100 units. The party is not permitted to buy more than its actual needs (for example, the party cannot buy excess units for resale).
- cContract 3: A minimum of 60 units and as many units needed to satisfy its actual needs in excess of 60 units. The party is not permitted to buy more than its actual needs (for example, the party cannot buy excess units for resale).
- dContract 4: A minimum of 60 units and as many units needed to satisfy its actual needs in excess of 60 units up to a maximum of 100 units. The party is not permitted to buy more than its actual needs (for example, the party cannot buy excess units for resale).
815-10-55-6
Generally, the anticipated number of units covered by a requirements contract is equal to the buyer's needs. When a requirements contract is negotiated between the seller and buyer, both parties typically have the same general understanding of the buyer's estimated needs. Given the buyer's often exclusive reliance on the seller to supply all its needs of the commodity, it is imperative from the buyer's perspective that the supplier be knowledgeable with respect to anticipated volumes. In fact, the pricing provisions within requirements contracts are directly influenced by the estimated volumes.
815-10-55-7
This guidance focuses solely on whether the contracts under consideration have a notional amount pursuant to the definition in this Subtopic. These types of contracts may not satisfy certain of the other required criteria in this Subtopic for them to meet the definition of a derivative instrument. The conclusion that a requirements contract has a notional amount as defined in this Subtopic can be reached only if a reliable means to determine such a quantity exists. Application of this guidance to specific contracts is as follows:
- aContract 1—requirements contract. The identification of a requirements contract's notional amount may require the consideration of volumes or formulas contained in attachments or appendixes to the contract or other legally binding side agreements. The determination of a requirements contract's notional amount must be performed over the life of the contract and could result in the fluctuation of the notional amount if, for instance, the default provisions reference a rolling cumulative average of historical usage. If the notional amount is not determinable, making the quantification of such an amount highly subjective and relatively unreliable (for example, if a contract does not contain settlement and default provisions that explicitly reference quantities or provide a formula based on historical usage), such contracts are considered not to contain a notional amount as that term is used in this Subtopic. One technique to quantify and validate the notional amount in a requirements contract is to base the estimated volumes on the contract's settlement and default provisions. Often the default provisions of requirements contracts will specifically refer to anticipated quantities to utilize in the calculation of penalty amounts in the event of nonperformance. Other default provisions stipulate penalty amounts in the event of nonperformance based on average historical usage quantities of the buyer. If those amounts are determinable, they shall be considered the notional amount of the contract.
- bContract 2—requirements contract with a specified maximum quantity. Whether the contract has a notional amount depends. The same considerations discussed in (a) with respect to Contract 1 also apply to Contract 2; however, the notional amount cannot exceed 100 units.
- cContract 3—requirements contract with a specified minimum quantity. The contract has a notional amount. The same considerations discussed in (a) with respect to Contract 1 also apply to Contract 3; however, the notional amount of Contract 3 cannot be less than 60 units. A contract that specifies a minimum number of units always has a notional amount at least equal to the required minimum number of units. Only that portion of the requirements contract with a determinable notional amount would be accounted for as a derivative instrument under this Subtopic.
- dContract 4—requirements contract with a specified maximum and minimum quantities. The contract has a notional amount. The same considerations discussed in (a) with respect to Contract 1 also apply to Contract 4; however, the notional amount of Contract 4 cannot be less than 60 units or greater than 100 units. A contract that specifies a minimum number of units always has a notional amount at least equal to the required minimum number of units. Only that portion of the requirements contract with a determinable notional amount would be accounted for as a derivative instrument under this Subtopic.
815-10-55-8
The definition of a derivative instrument includes contracts that require gross exchanges of currencies (for example, currency swaps that require an exchange of different currencies at both inception and maturity). The initial exchange of currencies of equal fair values in those arrangements does not constitute an initial net investment in the contract. Instead, it is the exchange of one kind of cash for another kind of cash of equal value. The balance of the agreement, a forward contract that obligates and entitles both parties to exchange specified currencies, on specified dates, at specified prices, is a derivative instrument.
815-10-55-9
This guidance addresses the following matters:
- aAsymmetrical default provision does not constitute net settlement.
- bDetermining whether a structured payout constitutes net settlement.
815-10-55-10
Many commodity forward contracts contain default provisions that require the defaulting party (the party that fails to make or take physical delivery of the commodity) to reimburse the nondefaulting party for any loss incurred as illustrated in the following examples:
- aIf the buyer under the forward contract (Buyer) defaults (that is, does not take physical delivery of the commodity), the seller under that contract (Seller) will have to find another buyer in the market to take delivery. If the price received by Seller in the market is less than the contract price, Seller incurs a loss equal to the quantity of the commodity that would have been delivered under the forward contract multiplied by the difference between the contract price and the current market price. Buyer must pay Seller a penalty for nonperformance equal to that loss.
- bIf Seller defaults (that is, does not deliver the commodity physically), Buyer will have to find another seller in the market. If the price paid by Buyer in the market is more than the contract price, Seller must pay Buyer a penalty for nonperformance equal to the quantity of the commodity that would have been delivered under the forward contract multiplied by the difference between the contract price and the current market price.
815-10-55-11
For example, Buyer agreed to purchase 100 units of a commodity from Seller at $1.00 per unit:
- aAssume Buyer defaults on the forward contract by not taking delivery and Seller must sell the 100 units in the market at the prevailing market price of $.75 per unit. To compensate Seller for the loss incurred due to Buyer's default, Buyer must pay Seller a penalty of $25.00—that is, 100 units × ($1.00 - $.75).
- bSimilarly, assume that Seller defaults and Buyer must buy the 100 units it needs in the market at the prevailing market price of $1.30 per unit. To compensate Buyer for the loss incurred due to Seller's default, Seller must pay Buyer a penalty of $30.00—that is, 100 units × ($1.30 - $1.00).
815-10-55-12
Note that an asymmetrical default provision is designed to compensate the nondefaulting party for a loss incurred. The defaulting party cannot demand payment from the nondefaulting party to realize the changes in market price that would be favorable to the defaulting party if the contract were honored.
815-10-55-13
Under the forward contract in the example, if Buyer defaults when the market price is $1.10, Seller will be able to sell the units of the commodity into the market at $1.10 and realize a $10.00 greater gain than it would have under the contract. In that circumstance, the defaulting Buyer is not required to pay a penalty for nonperformance to Seller, nor is Seller required to pass the $10.00 extra gain to the defaulting Buyer.
815-10-55-14
Similarly, if Seller defaults when the market price is $.80, Buyer will be able to buy the units of the commodity in the market and pay $20.00 less than under the contract. In that circumstance, the defaulting Seller is not required to pay a penalty for nonperformance to Buyer, nor is Buyer required to pass the $20.00 savings on to the defaulting Seller.
815-10-55-15
In a forward contract with only an asymmetrical default provision, neither Buyer nor Seller can realize the benefits of changes in the price of the commodity through default on the contract. That is, Buyer cannot realize favorable changes in the intrinsic value of the forward contract except in both of the following circumstances:
- aBy taking delivery of the physical commodity
- bIn the event of default by Seller (which is an event beyond the control of Buyer).
815-10-55-16
Similarly, Seller cannot realize favorable changes in the intrinsic value of the forward contract except in either of the following circumstances:
- aBy making delivery of the physical commodity
- bIn the event of default by Buyer, which is an event beyond the control of Seller.
815-10-55-17
However, a pattern of having the asymmetrical default provision applied in contracts between certain counterparties would indicate the existence of a tacit agreement between those parties that the party in a loss position would always elect the default provision, thereby resulting in the understanding that there would always be net settlement. In that situation, those kinds of commodity contracts would meet the characteristic described as net settlement in paragraph 815-10-15-100.
815-10-55-18
In contrast, a contract that permits only one party to elect net settlement of the contract (by default or otherwise), and thus participate in either favorable changes only or both favorable and unfavorable price changes in the underlying, meets the derivative characteristic described in paragraph 815-10-15-83(c) and discussed in paragraph 815-10-15-100 for all parties to that contract. Such a default provision allows one party to elect net settlement of the contract under any pricing circumstance and consequently does not require delivery of an asset that is associated with the underlying. That default provision differs from the asymmetrical default provision in the example contract in paragraph 815-10-55-10 because it is not limited to compensating only the nondefaulting party for a loss incurred and is not solely within the control of the defaulting party.
815-10-55-19
Paragraph 815-10-15-104 explains that, upon settlement of a contract, in lieu of immediate net cash settlement of the gain or loss under the contract, the holder may receive a financial instrument involving terms that would provide for the gain or loss under the contract to be received or paid over a specified time period. Such a structured payout of the gain on a contract could also be described as an abnormally high yield on a required investment or borrowing in which the overall return is related to the amount of that contract's gain, in which case the contract would be considered to have met the characteristic of net settlement in paragraph 815-10-15-100.
815-10-55-20
Assume, instead, that, upon settlement of a contract, in lieu of immediate net cash settlement of the gain or loss under the contract, the holder is required to invest funds in or borrow funds from the other party so that the party in a gain position under the contract can obtain the value of that gain only over time as a traditional adjustment of the yield on the amount invested or the interest element on the amount borrowed. (A fixed-rate mortgage loan commitment is an example of a contract that requires the party in a gain position under the contract to borrow funds at a below-market interest rate at the time of the borrowing to obtain the benefit of that gain.) Paragraph 815-10-15-105 indicates that such a contract does not meet the characteristic of net settlement in paragraph 815-10-15-100.
815-10-55-21
In contrast, paragraph 815-10-15-106 explains that a contract that requires one party to the contract to invest funds in or borrow funds from the other party so that the party in a gain position under the contract can obtain the value of that gain over time as a nontraditional adjustment of the yield on the amount invested or the interest element on the amount borrowed may meet the characteristic of net settlement in paragraph 815-10-15-100. For example, if a contract required the party in a gain position under the contract to invest $100 in the other party's debt instrument that paid an abnormally high interest rate of 5,000 percent per day for a term whose length is dependent on the changes in the contract's underlying, an analysis of those terms would lead to the conclusion that the contract's settlement terms were in substance a structured payout of the contract's gain and thus that contract would be considered to have met the characteristic of net settlement in that paragraph.
815-10-55-22
This guidance addresses the following matters:
- aNormal purchases and normal sales—application to power purchase or sales agreements
- bDual-trigger financial guarantee contracts
- cCertain insurance contracts—dual-trigger property and casualty insurance contracts
- dDerivative instrument that impedes sale accounting
- e
815-10-55-23
This guidance addresses the following matters:
- aContracts that combine a forward contract and a purchased option contract
- bDistinguishing between options that are capacity contracts and financial options on electricity.
815-10-55-24
Paragraph 815-10-15-44 states that the inclusion of a purchased option that would, if exercised, require delivery of the related asset at an established price under the contract within a single contract that meets the definition of a derivative instrument disqualifies the entire contract from being eligible to qualify for the normal purchases and normal sales scope exception in this Subsection except as provided in paragraphs with respect to certain power purchase or sales agreements. Although the guidance that follows discusses such circumstances in the context of utilities and independent power producers, it applies to all entities that enter into contracts that combine a forward contract and a purchased option contract, not just to utilities and independent power producers. Some utilities and independent power producers have fuel supply contracts that require delivery of a contractual minimum quantity of fuel at a fixed price and have an option that permits the holder to take specified additional amounts of fuel at the same fixed price at various times. Essentially, that option to take more fuel is a purchased option that is combined with the forward contract in a single supply contract. Typically, the option to take additional fuel is built into the contract to ensure that the buyer has a supply of fuel to produce the electricity during peak demands; however, the buyer may have the ability to sell to third parties the additional fuel purchased through exercise of the purchased option. Due to the difficulty in estimating peak electricity load and thus the amount of fuel needed to generate the required electricity, those fuel supply contracts are common in the electric utility industry (though similar supply contracts may exist in other industries).
815-10-55-25
Those fuel supply contracts are not requirements contracts that are addressed in paragraphs . Many of those contracts meet the definition of a derivative instrument because they have a notional amount and an underlying, require no or a smaller initial net investment, and provide for net settlement (for example, through their default provisions or by requiring delivery of an asset that is readily convertible to cash). The fuel supply contract cannot qualify for the normal purchases and normal sales exception because of the optionality regarding the quantity of fuel to be delivered under the contract.
815-10-55-26
An entity shall not bifurcate the forward contract component and the option component of a fuel supply contract that in its entirety meets the definition of a derivative instrument and then assert that the forward contract component is eligible to qualify for the normal purchases and normal sales exception.
815-10-55-27
An entity may wish to enter into two separate contracts—a forward contract and an option—that economically achieve the same results as the single derivative instrument and determine whether the normal purchases and normal sales scope exception (as discussed beginning in paragraph 815-10-15-22) applies to the separate forward contract.
815-10-55-28
Similar to the contractual options discussed in Example 10 (see paragraph 815-10-55-121), this guidance addresses option components that would require delivery of the related asset at an established price under the contract.
815-10-55-29
If the option component does not provide any benefit to the holder beyond the assurance of a guaranteed supply of the underlying commodity for use in the normal course of business and that option component only permits the holder to purchase additional quantities at the market price at the date of delivery (that is, that option component will always have a fair value of zero), that option component would not require delivery of the related asset at an established price under the contract.
815-10-55-30
If an entity's single supply contract included at its inception both a forward contract and an option and, in subsequent renegotiations, that contract is negated and replaced by two separate contracts (a forward contract for a specific quantity that will be purchased and an option for additional quantities whose purchase is conditional upon exercise of the option), the new forward contract would be eligible to qualify for the normal purchases and normal sales exception (as discussed beginning in paragraph 815-10-15-22), whereas the new option would not be eligible for that exception. From its inception the new separate option would be accounted for under this Subtopic.
815-10-55-31
The following table lists characteristics of an option that is a capacity contract and a traditional option. The characteristics listed may be relevant to the application of paragraph 815-10-15-45(a)(2). Other characteristics not listed may also be relevant.
Option Contract That Is a Capacity Contract Financial Option Contract on Electricity 1 The contract usually specifies the power plant or group of power plants providing the electricity. No reference is made to the generation origination of the electricity. 2 The strike price (paid upon exercise) includes pricing terms to compensate the plant operator for variable operations and maintenance costs expected during the specified production periods. The strike price is structured based on the expected forward prices of power. 3 The specified quantity is based on individual needs of parties to the agreement. "The specified quantity reflects standard amounts of electric energy, which facilitate market liquidity (for example, exercise in increments of 10,000 kilowatt-hours)." 4 "The title transfer point is usually at one or a group of specified physical delivery point(s), as opposed to a major market hub." "The specified index transfer point is a major market hub (liquid trading hub), not seller- or buyer-site specific." 5 "The contract usually specifies certain operational performance by the facility (for example, the achievement of a certain heat rate)." No operational performance is specified (not plant specific). 6 "The contract sometimes incorporates requirements for interconnection facilities, physical transmission facilities, or reservations for transmission services." None specified. 7 "The contract may specify jointly agreed-to plant outages (for example, for maintenance) and provide for penalties in the event of unexpected outages." Penalties for outages are not specified (not plant specific). 8 "Damage provisions upon default are usually based on a reduction of the capacity payment (which is not market based). If default provisions specify market liquidating damages, they usually contain some form of floor, ceiling, or both. The characteristics of the default provision are usually tied to the expected generation facility." Damage provisions upon default are based on market liquidating damages. 9 The contract's term is usually long (one year or more). The contract's term is not longer than 18 to 24 months because financial options on electricity are currently illiquid beyond that period.
815-10-55-32
Entity ABC extends credit to consumers through credit cards and personal loans of various sorts. Entity ABC is exposed to credit losses from its managed asset portfolio, including owned and securitized receivables. Entity ABC would like to purchase an insurance policy to protect itself against high levels of consumer default.
815-10-55-33
The proposed insurance policy will entitle Entity ABC to collect claims to the extent that its credit losses exceed a specified minimum level but limited to the amount by which the credit losses on a customized pool or index of consumer loans exceed that same specified minimum level. Thus, Entity ABC will collect claims based on the lesser of the following:
- aEntity ABC's actual credit losses
- bThe credit losses on a customized pool or index of consumer loans.
815-10-55-34
Although the insurer's payment to Entity ABC may be affected by credit losses on a customized pool, the payment nevertheless represents compensation for actual credit losses Entity ABC incurred. Entity ABC purchases this insurance to obtain a lower premium because claims are limited by external charge-off rates and the insurer is not exposed to Entity ABC's underwriting performance.
815-10-55-35
This type of control may also exist in property and casualty reinsurance policies. For example, an insurance entity may purchase reinsurance that covers actual hurricane losses in excess of a specified level in their block of business, but the coverage does not apply to losses in excess of a geographically diversified index of hurricane losses.
815-10-55-36
Financial guarantee insurance contracts are not subject to this Subtopic only if all of the conditions in paragraph 815-10-15-58 are met. The description of the financial guarantee insurance contract in paragraph 815-10-55-32 is insufficient for determining whether those conditions are met. The following provisions of that contract represent a type of deductible and do not affect the application of the conditions in paragraph 815-10-15-58:
- aThe provision that limits any claims to the extent that Entity ABC's actual credit losses exceed a specified minimum level
- bThe provision that limits any payments for those claims to the amount by which the credit losses on a customized pool or index of consumer loans exceed that same specified minimum level.
815-10-55-37
A common characteristic of dual-trigger policies is that the payment of a claim is triggered by the occurrence of two events (that is, the occurrence of both an insurable event and changes in a separate pre-identified variable). Because the likelihood of both events occurring is less than the likelihood of only one of the events occurring, the dual-trigger policy premiums are lower than traditional policies that insure only one of the risks. The policyholder is often purchasing the policy to provide for coverage against a catastrophe because if both events occur, the combined impact may be disastrous to its business.
815-10-55-38
Paragraph 815-10-55-40 addresses seven contracts that illustrate the characteristics of dual-trigger policies offered to different types of policyholders that have different risk management needs. All seven contracts qualify for either the exception in paragraph 815-10-15-53(b) for traditional property and casualty contracts or the exception in paragraph 815-10-15-59(b) for non-exchange-traded contracts involving nonfinancial assets. Therefore, the dual-trigger variable in those contracts is not separated and accounted for separately as a derivative instrument.
815-10-55-39
In contrast, paragraph 815-15-55-12 states that, if a contract issued by an insurance entity involves essentially assured amounts of cash flows based on insurable events that are highly probable of occurrence (as discussed in paragraph 815-10-15-55(c)), an embedded derivative related to changes in the separate pre-identified variable for that portion of the contract would be required to be separately accounted for as a derivative instrument.
815-10-55-40
Following are descriptions of seven contracts:
- aContract A—electric utility. A dual-trigger policy pays for a level of actual losses caused by the following two events occurring simultaneously:
- 1A power outage resulting from equipment failure or storm-related damage causes more than 500 megawatts of lost power.
- 2The spot market price for power exceeds $65 per megawatt hour during the storm or equipment-failure period.
The contract pays the difference between the strike price and the actual market price for the lost power (that is, the cost of replacement power). - 1
- bContract B—trucking delivery entity. A dual-trigger policy pays extra expenses associated with rerouting trucks over a certain time period if snowfall exceeds a specified level during that time period. The snowfall causes delays and creates the need to reroute trucks to meet delivery demands.
- cContract C—hospital.A dual-trigger policy pays actual medical malpractice claims above a specified level only if the value of the hospital's equity portfolio falls below a specified level during the same period.
- dContract D—iron ore mining entity. A dual-trigger policy pays a specified level of workers' compensation claims (not to exceed actual claims) if the claims exceed a specified level at the same time iron ore prices decrease below a specified level.
- eContract E—golf resort in Florida. A dual-trigger policy pays property damage from hurricanes incurred by a specific golf resort in Florida; however, the losses are covered only if other golf courses in the region incur hurricane-related losses and the claims cannot exceed the average property damages incurred by the other golf resorts in the county.
- fContract F—cherry orchard in Michigan. A dual-trigger policy pays crop losses incurred due to bad weather during growing season, and the claims are at risk of being reduced based on changes in the inflation rate in Brazil. The cherry producer has no operations in Brazil or any transactions in Brazilian currency. However, a Brazilian cherry producer exports cherries to the United States and is a competitor of the Michigan cherry producer.
- gContract G—property-casualty reinsurance contract. Reinsurance contracts, which indemnify the holder of the contract (the reinsured) against loss or liability relating to insurance risk, are accounted for under the provisions of Topic 944. Reinsurance contract provisions often adjust the amount at risk or the price of the amount at risk for a number of events or circumstances, such as loss experience or premium volume, while continuing to provide indemnification related to insurance risk. One type of reinsurance contract, an excess contract, provides the reinsured with indemnification against a finite amount of insured losses in excess of a defined level of insured losses retained by the reinsured. Example 11 (see paragraph 815-10-55-132) illustrates a reinsurance contract with a provision that adjusts the retention amount downward based on the performance of a specified equity index.
815-10-55-41
The following guidance illustrates application of the scope exception (as discussed beginning in paragraph 815-10-15-63) for a derivative instrument that impedes sales accounting to situations in which the transferor accounts for the transfer as a financing:
- aIf a transferor transfers financial assets but retains a call option on those assets, the net settlement criterion (as discussed beginning in paragraph 815-10-15-119) may be satisfied because the assets transferred are readily obtainable; however, the transfer may fail the isolation criterion in paragraph 860-10-40-5(a) because of significant continued involvement by the transferor. In that example, because the transferor is required to continue to recognize the assets transferred, recognition of the call option on those assets would effectively result in recording the assets twice. Therefore, the derivative instrument is not subject to the scope of this Subtopic.
- bIn the situation described in (a), the transferor may have sold to the transferee a put option. Exercise of the put option by the transferee would result in the transferor repurchasing certain assets that it has transferred, but which it still records as assets in its balance sheet. Because the transferor is required to recognize the borrowing, recognition of the put option would result in recording the liability twice. Therefore, the derivative instrument is not subject to the scope of this Subtopic.
- cA transferor may transfer fixed-rate financial assets to a transferee and guarantee a variable-rate return. If the transfer is accounted for as a sale and an interest-rate swap is entered into as part of the contractual provisions of the transfer, the transferor records the interest rate swap as one of the financial components. In that case, the interest rate swap should be accounted for separately in accordance with this Subtopic. However, if the transfer is accounted for as a financing, the transferor records on its balance sheet the issuance of variable-rate debt and continues to report the fixed-rate financial assets; no derivative instrument is recognized under this Subtopic.
- dIn a securitization transaction, a transferor transfers $100 of fixed-rate financial assets and the contractual terms of the beneficial interests incorporate an interest rate swap with a notional principal of $1 million. If the transfer is accounted for as a sale and the interest rate swap is entered into as part of the contractual provisions of the transfer, the transferor identifies and records the interest rate swap as one of the financial components. In that case, the interest rate swap would be accounted for separately in accordance with this Subtopic. However, if the transfer is accounted for as a financing, the transferor records in its balance sheet a $100 variable-rate borrowing and continues to report the $100 of fixed-rate financial assets. In this instance, because the liability is leveraged, requiring computation of interest flows based on a $1 million notional amount, the liability (which does not meet the definition of a derivative instrument in its entirety) is a hybrid instrument that contains an embedded derivative—such as an interest rate swap with a notional amount of $999,900. That embedded derivative is not clearly and closely related to the host contract under Section 815-15-25 (see paragraph 815-15-25-1[c]) because it could result in a rate of return on the counterparty's asset that is at least double the initial rate and that is at least twice what otherwise would be the then-current market return for a contract that has the same terms as the host contract and that involves a debtor with credit quality similar to the issuer's credit quality at inception. Therefore, the derivative instrument must be recorded separately under paragraph 815-15-25-1.
815-10-55-43
This guidance illustrates the application of Section 815-10-15 in the following situations:
- aContract with payment provision
- bCredit derivatives
- cEquity options issued to employees and nonemployees
- d
- eRepurchase agreements and wash sales
- fShort sales (sales of borrowed securities)
- gTake-or-pay contracts.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8This guidance illustrates the application of Section 815-10-15 in the following situations: - a
- bCredit derivatives
- cEquity options issued to employees and nonemployees
- d
- eRepurchase agreements and wash sales
- fShort sales (sales of borrowed securities)
- gTake-or-pay contracts.
815-10-55-44
Paragraph superseded by Accounting Standards Update No. 2025-07.
If the contract contains a payment provision that requires the issuer to pay to the holder a specified dollar amount based on a financial variable, the contract is subject to the requirements of this Subtopic.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8| Editor's Note: Paragraph 815-10-55-44 will be will be superseded upon transition, together with its heading. |
| • • > Contract with Payment Provision |
815-10-55-45
Many different types of contracts are indexed to the creditworthiness of a specified entity or group of entities, but not all of them are derivative instruments. Credit-indexed contracts that have certain characteristics described in paragraph 815-10-15-58 are guarantees and are not subject to the requirements of this Subtopic. Credit-indexed contracts (often referred to as credit derivatives) that do not have the characteristics necessary to qualify for the exception in that paragraph are subject to the requirements of this Subtopic. One example of the latter is a credit-indexed contract that requires a payment due to changes in the creditworthiness of a specified entity even if neither party incurs a loss due to the change (other than a loss caused by the payment under the credit-indexed contract).
815-10-55-46
Some entities issue stock options to grantees in which the underlying shares are stock of an unrelated entity. Consider the following example:
- aEntity A awards an option to a grantee.
- bThe terms of the option award provide that, if the grantee continues to provide services to Entity A for 3 years, the grantee may exercise the option and purchase 1 share of common stock of Entity B, a publicly traded entity, for $10 from Entity A.
- cEntity B is unrelated to Entity A and, therefore, is not a subsidiary or accounted for by the equity method.
815-10-55-47
The option award in this example is not within the scope of Topic 718 because the underlying stock is not an equity instrument of the grantor.
815-10-55-48
The option award is not subject to Topic 718. Rather, the option award in the example in paragraph 815-10-55-46 meets the definition of a derivative instrument in this Subtopic and, therefore, should be accounted for by the grantor as a derivative instrument under this Subtopic. After vesting, the option award would continue to be accounted for as a derivative instrument under this Subtopic.
815-10-55-48A
Paragraphs contain the concept that equity instruments that are granted in share-based payment transactions may initially be subject to that Subtopic, but after certain events or circumstances, those equity instruments may cease being subject to that Subtopic. The terms of an award that ceases to be subject to Topic 718 in accordance with paragraphs should be analyzed to determine whether the award is subject to this Subtopic.
815-10-55-54
The exception in paragraph 815-10-15-74(b) does not apply to the holder of those derivative instruments.
815-10-55-55
Thus, paragraph 815-10-15-75(a) explains that equity instruments (including stock options) received by nonemployees as compensation for goods and services are included in the scope of this Subtopic assuming the contract has all the characteristics of a derivative instrument.
815-10-55-56
Repurchase agreements and wash sales that are accounted for as sales (as described in paragraphs 860-10-55-55 and 860-10-55-57) and in which the transferor is both obligated and entitled to repurchase the transferred asset at a fixed or determinable price contain two separate features, one of which may be a derivative instrument. The initial exchange of financial assets for cash is a sale-purchase transaction—generally not a transaction that involves a derivative instrument. However, the accompanying forward contract that gives the transferor the right and obligation to repurchase the transferred asset involves an underlying and a notional amount (the price of the security and its denomination), and it does not require an initial net investment in the contract. Consequently, if the forward contract requires delivery of a security that is readily convertible to cash or otherwise meets the net settlement criterion as discussed beginning in paragraph 815-10-15-99, it is subject to the requirements of this Subtopic.
815-10-55-57
The following discussion applies only to short sales with the characteristics described. Some groups of transactions that are referred to as short sales may have different characteristics. If so, a different analysis would be appropriate, and other derivative instruments may be involved. Short sales (sales of borrowed securities) typically involve all of the following activities:
- aSelling a security (by the short seller to the purchaser)
- bBorrowing a security (by the short seller from the lender)
- cDelivering the borrowed security (by the short seller to the purchaser)
- dPurchasing a security (by the short seller from the market)
- eDelivering the purchased security (by the short seller to the lender).
815-10-55-58
A contract that distinguishes a short sale involves activities in (b) and (e) in the preceding paragraph, borrowing a security and replacing it by delivering an identical security. Such a contract has two of the three characteristics of a derivative instrument. The settlement is based on an underlying (the price of the security) and a notional amount (the face amount of the security or the number of shares), and the settlement is made by delivery of a security that is readily convertible to cash. However, the other characteristic, no initial net investment or an initial net investment that is smaller by more than a nominal amount than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, is not present. (See paragraphs .) The borrowed security is the lender's initial net investment in the contract. Consequently, the contract relating to activities in (b) and in (e) in the preceding paragraph is not a derivative instrument.
815-10-55-59
The other two contracts (one for activities in paragraph 815-10-55-57[a] and in paragraph 815-10-55-57[c] and the other for activity in paragraph 815-10-55-57[d]) are routine and do not generally involve derivative instruments. However, if a forward purchase or forward sale is involved, and the contract does not qualify for the exception in paragraphs , it is subject to the requirements of this Subtopic.
815-10-55-60
Whether a take-or-pay contract is subject to this Subtopic depends on its terms. For example, if the product to be delivered is not readily convertible to cash and there is no net settlement option, the contract fails to meet the net settlement criterion in paragraph 815-10-15-83(c) and is not subject to the requirements of this Subtopic. In certain circumstances, a take-or-pay contract may represent or contain a lease that should be accounted for in accordance with Topic 842. (Paragraph 815-10-15-79 explains that leases subject to that Topic are not subject to this Subtopic.)
815-10-55-62
Determining whether realized gains and losses on physically settled derivative instruments not held for trading purposes should be reported in the income statement on a gross or net basis is a matter of judgment that depends on the relevant facts and circumstances. Consideration of the facts and circumstances should be made in the context of the various activities of the entity rather than based solely on the terms of the individual contracts. In evaluating the facts and circumstances for purposes of determining whether an arrangement should be reported on a gross or net basis, all of the following may be considered:
- aThe economic substance of the transaction
- bThe guidance set forth in Topic 845 relative to nonmonetary exchanges
- cThe principal versus agent considerations provided in paragraphs .
815-10-55-63
From the perspective of the issuer of the contract, synthetic guaranteed investment contracts are derivative instruments as defined in this Subtopic. Synthetic guaranteed investment contracts contain an underlying, the formula by which interest is calculated, and a notional amount. The interplay between the fair value of a portfolio of segregated assets and a notional amount together determine the amount of the settlement(s), if any, due from the contract issuer, after considering all contract terms. Depending on the specifics of the contract, a synthetic guaranteed investment contract requires either no initial investment or the payment of a risk charge or fee (covering either the entire contract or, more typically, an initial period of the contract). The terms of a synthetic guaranteed investment contract require net settlement because the issuer of the contract makes a payment to the holder equal to the net amount due. For a background discussion of synthetic guaranteed investment contracts, including a comparison with traditional and benefit-responsive guaranteed investment contracts, see paragraph 815-10-05-8. Example 17 (see paragraph 815-10-55-169) illustrates contractual terms of a synthetic guaranteed investment contracts.
Illustrations
815-10-55-66
The following Cases illustrate the application of paragraph 815-10-15-6:
- aAttached call option (Case A)
- bTransferable call option (Case B).
815-10-55-67
This Case presents a transaction that involves the addition of a call option contemporaneously with or after the issuance of debt.
815-10-55-68
Entity X issues 15-year puttable bonds to an Investment Banker for $102. The put option may be exercised at the end of five years. Contemporaneously, the Investment Banker sells the bonds with an attached call option to Investor A for $100. (The call option is a written option from the perspective of Investor A and a purchased option from the perspective of the Investment Banker.) The Investment Banker also sells to Investor B for $3 the call option purchased from Investor A on those bonds. The call option has an exercise date that is the same as the exercise date on the embedded put option. At the end of five years, if interest rates increase, Investor A would presumably put the bonds back to Entity X, the issuer. If interest rates decrease, Investor B would presumably call the bonds from Investor A.
815-10-55-69
As required by paragraph 815-10-15-6, the call option that is attached by the Investment Banker is a separate derivative instrument from the perspective of Investor A.
815-10-55-70
This Case presents a group of transactions with a similar overall effect to that in Case A.
815-10-55-71
Entity Y issues 15-year puttable bonds to Investor A for $102. The put option may be exercised at the end of five years. Contemporaneously, Entity Y purchases a transferable call option on the bonds from Investor A for $2. Entity Y immediately sells that call option to Investor B for $3. The call option has an exercise date that is the same as the exercise date of the embedded put option. At the end of five years, if rates increase, Investor A would presumably put the bonds back to Entity Y, the issuer. If rates decrease, Investor B would presumably call the bonds from Investor A.
815-10-55-72
As required by paragraph 815-10-15-6, the call option is a separate freestanding derivative instrument that must be reported at fair value with changes in value recognized currently in earnings unless designated as a hedging instrument.
815-10-55-73
This Example illustrates whether a contract meets the criterion in paragraph 815-10-15-83(b) related to initial net investment and therefore meets the definition of a derivative instrument and, if not, whether there is an embedded derivative that warrants separate accounting.
815-10-55-74
An entity enters into a forward contract that requires the purchase of 1 share of an unrelated entity's common stock in 1 year for $110 (the market forward price) and at inception of the contract, the entity elects to prepay the contract pursuant to its terms for $105 (the current price of the share of common stock).
815-10-55-75
If no prepayment is made at inception, the contract would meet the criterion in paragraph 815-10-15-83(b) because it does not require an initial net investment but, rather, contains an unexercised election to prepay the contract at inception. If the contract gives the entity the option to prepay the contract at a later date during its 1-year term (at $105 or some other specified amount), exercise of that option would be accounted for as a loan that is repayable at $110 at the end of the forward contract's 1-year term. If, instead, the entity elects to prepay the contract at inception for $105, the contract does not meet the definition of a freestanding derivative instrument. The initial net investment of $105 is equal to the initial price of the 1 share of stock being purchased under the contract and therefore is equal to the investment that would be required for other types of contracts that would be expected to have a similar response to changes in market factors. That is, the initial net investment is equal to the amount that would be exchanged to acquire the asset related to the underlying.
815-10-55-76
However, the entity must assess whether that nonderivative instrument contains an embedded derivative that, pursuant to paragraph 815-15-25-1, requires separate accounting as a derivative unless the fair value election is made pursuant to paragraph 815-15-25-4. In this instance, the prepaid contract is a hybrid instrument that is composed of a debt instrument as the host contract (that is, a loan that is repayable at $110 at the end of the forward contract's 1-year term) and an embedded derivative based on equity prices. The host contract is a debt instrument because the holder has none of the rights of a shareholder, such as the ability to vote the shares and receive distributions to shareholders. (See paragraph 815-15-25-16.) Unless the hybrid instrument is remeasured at fair value with changes in value recorded in earnings as they occur, the embedded derivative must be separated from the host contract because the economic characteristics and risks of a derivative based on equity prices are not clearly and closely related to a debt host contract, and a separate instrument with the same terms as the embedded derivative would be a derivative instrument subject to the requirements of this Subtopic.
815-10-55-77
The following Cases illustrate the determination of an underlying if a commodity contract includes a fixed element and a variable element:
- aA commodity contract between two parties to transact a fixed quantity at a specified future date at a fixed price (such as the commodity's forward price at the inception of the contract) (Case A)
- bA commodity contract between two parties to transact a fixed quantity at a specified future date at whatever the prevailing market price might be at that future date (Case B)
- cA commodity contract having features of both a fixed-price contract and variable-price contract; specifically, an agreement to purchase a commodity in the future at the prevailing market index price at that future date plus or minus a fixed basis differential set at the inception of the contract (Case C).
815-10-55-78
Assume that each of the contracts in Cases A, B, and C has the characteristics of notional amount, underlying, and no initial net investment and that the commodity to be delivered is readily convertible to cash as discussed beginning in paragraph 815-10-15-119.
815-10-55-79
This fixed-price commodity contract is a derivative instrument because it meets all the criteria in paragraph 815-10-15-83, including having an underlying (namely, the price of the commodity), as required by paragraph 815-10-15-83(a)(1). The contract's fair value will change as the underlying changes because the contract price is not the prevailing market price at the future transaction date. A party to this contract would need to determine if the normal purchases and normal sales exception (see discussion beginning in paragraph 815-10-15-22) applies to the contract.
815-10-55-80
This variable-price commodity contract is a derivative instrument because it meets all the criteria in paragraph 815-10-15-83, including having an underlying (namely, the price of the commodity), as required by paragraph 815-10-15-83(a)(1). However, because the contract price is the prevailing market price at the future transaction date, the variable-price commodity contract would not be expected to have a fair value other than zero. A party to this contract would need to determine if the normal purchases and normal sales exception (see discussion beginning in paragraph 815-10-15-22) applies to the contract.
815-10-55-81
In a commodity contract between a buyer and seller of crude oil, the buyer is a refinery that seeks to use the crude oil in the production of unleaded gasoline. The buyer agrees in January to buy 1,000,000 barrels of a specific type of crude oil in July from the seller at the July 1 West Texas Intermediate index price plus $1.00 per barrel. The contract appears to be primarily a variable-price contract, but includes a fixed margin above that price. (If the buyer or the seller no longer wants exposure to fluctuations in the West Texas Intermediate index between January and July, it will separately use the futures market to fix the West Texas Intermediate index portion of the contract.)
815-10-55-82
The fixed $1.00 differential is commonly referred to as the basis differential, but it reflects multiple factors, such as timing, quality, and location. If not fixed, the basis differential can be very volatile, because it captures the passage of time (a financing element), changes in relative value of different qualities (or grades) of crude to each other (light versus heavy, sweet versus sour), and changes in the attractiveness of locations from the central pricing hub (Cushing, Oklahoma) relative to each other factor. Supply and demand is a critical factor in influencing the changes in basis due to quality and location; for example, an increase in imports of light crude through the Gulf of Mexico corridor will tend to lower the basis differential for light crude (falling prices due to increased supply) and tend to direct domestic supplies of light crude to northern U.S. locations (because the foreign oil fills southern U.S. demand), lowering the basis differential for contracts calling for delivery at northern points (again due to increased supply in the North). The basis differential therefore is not a simple fixed transport charge, but rather a complex and volatile variable in itself. For this reason, energy traders may specialize solely in trading basis and seeking the most attractive differential at all times relative to the West Texas Intermediate index—fixing and unfixing basis by selling contracts back to counterparties or entering into offsetting contracts with third parties.
815-10-55-83
The whole mixed-attribute contract is a derivative instrument because the basis differential is a market variable in determining the final transaction price under the contract, and this variable has been fixed in the contract, producing an underlying. (If the differential was a market pricing convention that typically would not be expected to change, the contract would be a derivative instrument with very minor, if any, fluctuations in fair value.) The fact that the base commodity price in the contract is variable will help to mute the fluctuations in fair value of the contract as a whole, but there still will be potential changes in fair value of the overall contract because of the fixed-basis element. A party to this contract would need to determine if the normal purchases and normal sales exception applies to the contract. (Paragraph 815-20-55-47 explains why such a mixed-attribute contract that is a derivative instrument would generally not be sufficiently effective if designated as the sole hedging instrument in a cash flow hedge of the anticipated purchase or sale of the commodity.)
815-10-55-84
As required by paragraphs and , respectively, the evaluation of whether a market mechanism exists and whether items to be delivered under a contract are readily convertible to cash must be performed at inception and on an ongoing basis throughout a contract's life. For example, if a market develops, if an entity effects an initial public offering, or if daily trading volume changes for a sustained period of time, then those events need to be considered in reevaluating whether the contract meets the definition of a derivative instrument. Similarly, if events occur after the inception or acquisition of a contract that would cause a contract that previously met the definition of a derivative instrument to cease meeting the criteria (for example, an entity becomes delisted from a national stock exchange), then that contract cannot continue to be accounted for under this Subtopic. The guidance in paragraphs about assessing the significance of transaction costs is not relevant when determining whether such a contract no longer meets the definition of a derivative instrument.
815-10-55-85
The following Cases illustrate the importance of ongoing evaluation:
- aMarket mechanism develops after contract inception (Case A).
- bInitial public offering makes shares readily convertible to cash after contract inception (Case B).
- cIncreased trading activity makes shares readily convertible to cash after contract inception (Case C).
- dDelisting makes shares not readily convertible to cash after contract inception (Case D).
815-10-55-86
A purchase contract for future delivery of commodity X is entered into and, at the inception of the contract, the market for contracts on commodity X is a relatively thin market, such that brokers do not stand ready to buy and sell the contracts. As time passes, the market for commodity X matures and broker-dealer networks develop. The existence of the broker-dealer market and the ability of the purchaser to be relieved of its rights and obligations under the purchase contract are consistent with the characteristics of a market mechanism as discussed beginning in paragraph 815-10-15-110. Accordingly, the purchase contract will have the characteristics of net settlement as defined by paragraph 815-10-15-110 as broker-dealer networks develop.
815-10-55-87
A nontransferable forward contract on a nonpublic entity's stock that provides only for gross physical settlement is generally not a derivative instrument because the net settlement criteria are not met. If the entity, at some point in the future, accomplishes an initial public offering of its shares and the original contract is still outstanding, the shares to be delivered would be considered to be readily convertible to cash (assuming that the shares under the contract could be rapidly absorbed in the market without significantly affecting the price).
815-10-55-88
A nontransferable forward contract on a public entity's stock provides for delivery on a single date of a significant number of shares that, at the inception of the contract, would significantly affect the price of the public entity's stock in the market if sold within a few days. As a result, the contract does not satisfy the readily-convertible-to-cash criterion. However, at some later date, the trading activity of the public entity's stock increases significantly. Upon a subsequent evaluation of whether the shares are readily convertible to cash, the number of shares to be delivered would be minimal in relation to the new average daily trading volume such that the contract would then satisfy the net settlement characteristic.
815-10-55-89
A nontransferable forward contract on a public entity's stock meets the net settlement criteria (as discussed beginning in paragraph 815-10-15-119) in that, at inception of the contract, the shares are expected to be readily convertible to cash when delivered under the contract. Assume that there is no other way that the contract meets the net settlement criteria. The public entity subsequently becomes delisted from the stock exchange, thus causing the shares to be delivered under the contract to no longer be readily convertible to cash.
815-10-55-90
This Example illustrates the concept of net share settlement. Entity A has a warrant to buy 100 shares of the common stock of Entity X at $10 a share. Entity X is a privately held entity. The warrant provides Entity X with the choice of settling the contract physically (gross 100 shares) or on a net share basis. The stock price increases to $20 a share. Instead of Entity A paying $1,000 cash and taking full physical delivery of the 100 shares, the contract is net share settled and Entity A receives 50 shares of stock without having to pay any cash for them. (Net share settlement is sometimes described as a cashless exercise.) The 50 shares are computed as the warrant's $1,000 fair value upon exercise divided by the $20 stock price per share at that date.
815-10-55-91
The following Cases illustrate whether an ability to offset constitutes a market mechanism as discussed under paragraph 815-10-15-111(b):
- aMarket mechanism relieves rights and obligations (Case A).
- bMechanism to offset does not relieve rights and obligations (Case B).
- cMechanism to offset relieves rights and obligations (Case C).
815-10-55-92
For Cases A and B, assume that the contract would not qualify for the normal purchases and sales exception (as discussed beginning in paragraph 815-10-15-22). Assume also for Cases A and B that the asset associated with the underlying is not readily convertible to cash (as discussed beginning in paragraph 815-10-15-119).
815-10-55-93
Assume a broker-dealer stands ready to buy and sell a non-exchange-traded commodity forward contract that would relieve either party to the contract of its obligation to make (or right to accept) delivery of the commodity and its right to receive (or obligation to make) payment under the contract by arranging for a broker-dealer to make or accept delivery and paying the broker-dealer a commission plus any difference between the contract price and the current market price of the commodity.
815-10-55-94
The arrangement is considered a market mechanism under paragraph 815-10-15-110.
815-10-55-95
In contrast, an agreement whereby the broker-dealer will merely make (or accept) delivery on behalf of an entity does not relieve the entity of its rights and obligations under the contract and is thereby is not a market mechanism.
815-10-55-96
Entity A contracts to sell a commodity such as iron ore to Entity B at a fixed price, and Entity B offsets its purchase contract by entering into a separate contract to sell the same commodity to Entity C at a different fixed price, instructing Entity A to deliver directly to Entity C. If Entity A fails to deliver to Entity C, Entity C will legally look to Entity B for remedy, not Entity A. Even absent failure to perform, Entity B will still pay Entity A, and Entity C will pay Entity B, even though Entity A may deliver directly to Entity C. Assume the contracts in this series have an underlying and a notional amount and, therefore, they will at any given point in time have a positive or negative fair value.
815-10-55-97
The arrangement is not a market mechanism because Entity B is not relieved of its rights and obligations from the original contract. The original contract survives and is not actually sold. The offsetting contract carries a new set of legal rights and obligations; however, those rights and obligations generally offset, rather than relieve, the original contract's set of legal rights and obligations.
815-10-55-98
A mercantile exchange that trades futures contracts offers a ready opportunity to enter into an offsetting contract that can precisely cancel the rights and obligations of another futures contract (because the counterparty legally is the futures exchange itself), and thus the mercantile exchange does constitute a market mechanism.
815-10-55-99
The following Cases illustrate consideration of the relevance of daily transaction volumes to the characteristic of net settlement in deciding whether, from the investor's perspective, the convertible bond contains an embedded derivative that must be accounted for separately:
- aSingle bond with multiple conversion options (Case A)
- bMultiple bonds each having single conversion option (Case B).
815-10-55-100
The Cases illustrate that the form of the financial instrument is important; paragraph 815-10-15-123 explains that individual instruments cannot be combined for evaluation purposes to circumvent compliance with the criteria beginning in paragraph 815-10-15-119. Further, paragraph 815-10-15-111(c) explains that contracts shall be evaluated on an individual basis, not on an aggregate-holdings basis.
815-10-55-101
Investor A holds a convertible bond classified as an available-for-sale security under Topic 320. The bond has all of the following additional characteristics:
- aIt is not exchange-traded and can be converted into common stock of the debtor, which is traded on an exchange.
- bIt has a face amount of $100 million and is convertible into 10 million shares of common stock.
- cIt may be converted in full or in increments of $1,000 immediately or at any time during the next 2 years.
- dIf it were converted in a $1,000 increment, Investor A would receive 100 shares of common stock.
815-10-55-102
Assume further that the market condition for the debtor's stock is such that up to 500,000 shares of its stock can be sold rapidly without the share price being significantly affected.
815-10-55-103
The embedded conversion option meets the criteria in paragraph 815-10-15-83(a) through (b) but does not meet the criteria in paragraphs 815-10-15-100 and 815-10-15-110, in part because the option is not traded and it cannot be separated and transferred to another party.
815-10-55-104
It is clear that the embedded equity conversion feature is not clearly and closely related to the debt host instrument.
815-10-55-105
The bond may be converted in $1,000 increments and those increments, by themselves, may be sold rapidly without significantly affecting price, in which case the criteria discussed beginning in paragraph 815-10-15-119 would be met. However, if the holder simultaneously converted the entire bond, or a significant portion of the bond, the shares received could not be readily converted to cash without incurring a significant block discount.
815-10-55-106
From Investor A's perspective, the conversion option should be accounted for as a compound embedded derivative in its entirety, separately from the debt host, because the conversion feature allows the holder to convert the convertible bond in 100,000 increments and the shares converted in each increment are readily convertible to cash under the criteria discussed beginning in paragraph 815-10-15-119. Investor A need not determine whether the entire bond, if converted, could be sold without affecting the price.
815-10-55-107
Because the $100 million bond is convertible in increments of $1,000, the convertible bond is essentially embedded with 100,000 equity conversion options, each with a notional amount of 100 shares. Each of the equity conversion options individually has the characteristic of net settlement discussed beginning in paragraph 815-10-15-119 because the 100 shares to be delivered are readily convertible to cash. Because the equity conversion options are not clearly and closely related to the host debt instrument, they must be separately accounted for. However, because an entity cannot identify more than 1 embedded derivative that warrants separate accounting, the 100,000 equity conversion options must be bifurcated as a single compound derivative. (Paragraphs say an entity is not permitted to account separately for more than one derivative feature embedded in a single hybrid instrument.)
815-10-55-108
There is a substantive difference between a $100 million convertible debt instrument that can be converted into equity shares only at one time in its entirety and a similar instrument that can be converted in increments of $1,000 of tendered debt; the analysis of the latter should not presume equality with the former.
815-10-55-109
Investor B has 100,000 individual $1,000 bonds that each convert into 100 shares of common stock. Assume those bonds are individual instruments but they were issued concurrently to Investor B.
815-10-55-110
From Investor B's perspective, the individual bonds each contain an embedded derivative that must be separately accounted for. Each individual bond is convertible into 100 shares, and the market would absorb 100 shares without significantly affecting the price of the stock.
815-10-55-111
This Example illustrates the effect of multiple deliveries on the consideration of net settlement described in Section 815-10-15. An entity has a five-year supply contract that obligates it to deliver at a specified price each month a specified quantity of a commodity that has interchangeable (fungible) units and for which quoted prices are available in an active market. However, the quoted prices that are available are for either a spot sale or a forward sale of the commodity with a maturity of 12 months or less. In other words, the forward market for the commodity beyond the next 12 months does not currently exist and is not expected to develop. There are brokers who are willing to take over the rights and obligations relating to the next 12 months of the supply contract, but not for periods beyond the next 12 months. With respect to the active spot market for the commodity, it can rapidly absorb the quantity specified in the supply contract for each individual month but not the total quantity for the entire five-year period in a single transaction (or in multiple transactions over the course of a day or so).
815-10-55-112
The supply contract does not contain a net settlement provision as described in paragraphs .
815-10-55-113
The 5-year commodity supply contract does not meet the net settlement characteristic in paragraph 815-10-15-110 at its inception because there is no market mechanism to net settle the entire 5-year contract—the forward market exists only for the next 12 months while the contract period is for the next 5 years. Accordingly, there is no market mechanism for the entity to settle the entire contract on a net basis. However, if the contract contained contractually separable increments that individually met the net settlement criteria, those contractually separable increments may be embedded derivatives. In this instance, the brokers in the market will not assume the rights and obligations of the entire contract. Note that the market mechanism in the net settlement characteristic in paragraph 815-10-15-110 relates to whether a party to the contract can be relieved of its rights and obligations under the entire contract, not merely whether an independent broker in the market stands ready to assume the selected rights and obligations.
815-10-55-114
The definition of a derivative instrument in this Subtopic must be applied based on the actual terms of the contract, including its maturity date and the total quantity of the underlying. This Subtopic does not permit bifurcation of a 5-year contract into 5 annual contracts, 60 monthly contracts, or 1,826 daily contracts in an attempt to assert that only a portion of the contract meets the definition of a derivative instrument. To do so would be to disregard one of the critical terms of the contract, that is, the term to the maturity date of the contract.
815-10-55-115
Based on the guidance in paragraph 815-10-15-3, the five-year commodity supply contract in the example, would, at the beginning of the fifth year, be reevaluated to determine whether the contract meets the net settlement characteristic in paragraph 815-10-15-110 and would likely meet the characteristic because a forward market for the contract would then exist for the remaining term of the contract.
815-10-55-116
The five-year commodity supply contract meets the net settlement characteristic as discussed beginning in paragraph 815-10-15-119. The criterion discussed beginning in that paragraph is met because an active spot market for the commodity exists today and is expected to be in existence in the future for each delivery date (for example, for quantities to be delivered each day or each month for the next five years) under the multiple delivery supply contract. The spot market can rapidly absorb the quantities specified for each monthly delivery without significantly affecting the price. The fact that the spot market may not be able to absorb within a few days the quantity specified in the entire five-year contract is irrelevant because the performance of the contract is spread out over a five-year period and, therefore, is not expected to occur within a few days.
815-10-55-117
This Example does not address whether or not the contract would qualify for the normal purchases and normal sales scope exception as discussed beginning in paragraph 815-10-15-22.
815-10-55-118
This Example illustrates the application of paragraph 815-10-15-17(c). Assume a variety of forward contracts exists for a when-issued security, such as a to-be-announced security, that provides a choice of settlement dates for each of the next three months (such as November, December, or January). An entity enters into a forward contract to purchase the to-be-announced security, which will otherwise meet the qualifications of paragraphs , that requires delivery in the second-nearest month (such as December), not the nearest month (such as November). The entity may not apply the regular-way security trade exception to the forward purchase contract that requires delivery of the to-be-announced security in the second-nearest month (such as December).
815-10-55-119
In this Example, the to-be-announced security (identified by issuer, contractual maturity of the underlying loans, and the net coupon, such as 30-year Government National Mortgage Association [GNMA] securities bearing interest of 7 percent) is available under multiple settlement periods (that is, the standardized settlement date in November, December, or January). The regular-way security trade exception may be applied only to forward contracts for that to-be-announced security that require delivery in November, the shortest period permitted for that type of to-be-announced security. The December and January settlement to-be-announced forward contracts must be accounted for as derivative instruments under this Subtopic.
815-10-55-120
If the forward contracts in this Example meet the hedge accounting criteria, they may be designated in cash flow hedges of the anticipated purchase of the securities, as discussed in paragraph 815-20-25-22.
815-10-55-121
In some circumstances, an option may be combined with a forward contract. In some instances, the optionality feature in the forward contract can modify the quantity of the asset to be delivered under the contract. In other cases, the optionality feature in the forward contract can modify only the price to be paid or the timing of the delivery.
815-10-55-122
This Example presents three Cases of forward contracts with optionality features:
- aOptionality feature involving price floor (cash-settled put option) written by purchaser and price cap (cash-settled call option) written by seller (Case A)
- bOptionality feature involving cash-settled put option written by purchaser (Case B)
- cOptionality feature involving physically settled put option written by purchaser (Case C).
815-10-55-123
In Cases A, B, and C, the optionality feature must be analyzed to determine whether it could modify the quantity of the asset to be delivered under the contract. In doing so, the conclusion as to whether the contract is eligible for the normal purchases and normal sales scope exception applies in the same way to both counterparties—the purchaser and the writer of the option (within the forward contract).
815-10-55-124
The contracts addressed in this Example do not have a price based on an underlying that is not clearly and closely related to the asset being purchased, nor do they require cash settlement of gains or losses as stipulated in paragraph 815-10-15-22.
815-10-55-125
Paragraph 815-10-15-43 explains that, if the optionality feature in the forward contract can modify the quantity of the asset to be delivered under the contract, but that option feature has expired or has been completely exercised (even if delivery has not yet occurred), there is no longer any uncertainty as to the quantity to be delivered under the forward contract. That paragraph explains that, following such expiration or exercise, the forward contract would be eligible for designation as a normal purchase or normal sale, provided that the other conditions in paragraph 815-10-15-22 are met.
815-10-55-126
Entity A enters into a forward contract to purchase on a specified date a specified quantity of a raw material that is readily convertible to cash. The purchase price is the current market price on the date of purchase, not to exceed a specified maximum price (a cap) nor to be less than a specified minimum price (a floor).
815-10-55-127
In this Case, the optionality feature cannot modify the quantity to be delivered; thus, the contract is eligible to qualify for the normal purchases and normal sales scope exception.
815-10-55-128
Entity B enters into a forward contract to purchase on a specified date a specified quantity of a raw material that is readily convertible to cash. The contract's purchase price is a fixed amount per unit that is below the current forward price; however, if the market price on the date of purchase has fallen below a specified level, Entity B's purchase price would be adjusted to a higher fixed amount significantly in excess of the current forward price at the inception of the contract. (The contract entered into by Entity B is a compound derivative consisting of a forward contract to purchase raw material at the original fixed price and a written option that obligates Entity B to purchase the raw material for the higher adjusted price if the market price of the raw material falls below the specified level. In exchange for the written option, Entity B received a premium representing the difference between the purchase price in the contract and the forward market price of the raw material at the inception of the contract.)
815-10-55-129
The forward purchase contract in this Case is eligible to qualify for the normal purchases and normal sales scope exception because the optionality feature in the contract cannot modify the quantity to be delivered.
815-10-55-130
Entity C enters into a forward contract to purchase on a specified date a specified quantity of a raw material that is readily convertible to cash. The contract's purchase price is a fixed amount per unit that is below the current forward price. However, if the market price on the date of purchase has fallen below a specified level that is below the contract's fixed purchase price, Entity C would be required to purchase a specified additional quantity of the raw material at the contract's fixed purchase price (which is above the current market price on the date of purchase). (The contract entered into by Entity C is a compound derivative consisting of a forward contract to purchase raw material at the original fixed price and a written option that obligates Entity C to purchase additional quantities of the raw material at an above-market price if the market price of the raw material falls below the specified level.)
815-10-55-131
The contract in this Case is not eligible to qualify for the normal purchases and normal sales scope exception because the optionality feature in the contract can modify the quantity of the asset to be delivered under the contract.
815-10-55-132
This Example illustrates a reinsurance contract with a provision that adjusts the retention amount downward based on the performance of a specified equity index as discussed in paragraph 815-10-55-40(g). Reinsurer enters into a reinsurance contract with Reinsured to indemnify Reinsured for certain insured losses in excess of a defined retention. The intent of the coverage is to protect Reinsured from significant or catastrophic property-casualty losses. The coverage would include a retention amount that would be adjusted downward according to a scale tied to the Dow Jones Industrial Average. If a catastrophic loss occurs, Reinsured would likely have to liquidate some of its investment holdings (bonds or equities) to pay its losses, which exposes Reinsured to significant investment risk in a down market. The adjustment feature provides protection against investment risk by allowing Reinsured to recover more losses in a declining investment market. Reinsured has no ability to receive appreciation in the Dow Jones Industrial Average.
- aParties: Reinsurer and Reinsured
- bCoverage: Property losses
- cPeriod: January 1, X1, through December 31, X1
- dRetention: $20 million per occurrence, adjusted downward in the same percentage as period-to-date (from January 1, X1, to measurement date) decreases in the Dow Jones Industrial Average, not to exceed 50%
- eLimit: $15 million per occurrence, $15 million per annum
- fPremium: $1.4 million per annum.
815-10-55-133
Both of the following scenarios assume that the Dow Jones Industrial Average on January 1, X1, was 10,000.
Scenario 1 Scenario 2 7/1/X1 9/1/X1 7/1/X1 9/1/X1 Property-casualty losses " $25,000,000 " " $25,000,000 " " $15,000,000 " " $15,000,000 " Dow Jones Industrial Average " 10,000 " " 8,000 " " 10,000 " " 7,000 " Retention " 20,000,000 " " 16,000,000 " " 20,000,000 " " 14,000,000 " Recovery under contract " 5,000,000 " " 9,000,000 " - " 1,000,000 "
815-10-55-133A
As discussed in paragraph 815-10-55-38, the contract qualifies for the exception in paragraph 815-10-15-53(b) for traditional property and casualty contracts and, so, the dual-trigger variable in the contract is not separated and accounted for separately as a derivative instrument.
815-10-55-134
This Example illustrates the guidance in paragraph 815-10-15-55(c) for a contract involving essentially assured amounts. Insured Entity has received at least $2 million in claim payments from its insurance entity (or at least $2 million in claim payments were made by the insurance entity on the insured entity's behalf) for each of the previous 5 years related to specific types of insured events that occur each year. That minimum level of coverage would not qualify for the insurance contract scope exclusion.
815-10-55-135
The following Cases illustrate the difference between physical and financial variables for purposes of applying the scope exception in paragraph 815-10-15-59(a):
The following Cases illustrate the difference between physical and financial variables for purposes of applying the scope exception in paragraph 815-10-15-59(a):
- aContract containing both a physical variable and a financial variable (Case A)
- bContract containing only a physical variable (Case B)
- cContract containing only a financial variable (Case C).
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8| Editor's Note: The heading that precedes paragraph 815-10-55-135 will be amended upon transition as shown below. The content of the paragraph will not change. |
| •> Example 13: Certain Contracts That Are Not Traded on an Exchange—Distinguishing between Physical and Financial Variables |
- aContract containing both a physical variable and a financial variable (Case A)
- bContract containing only a physical variable (Case B)
- cContract containing only a financial variable (Case C).
815-10-55-136
A contract's payment provision specifies that the issuer will pay to the holder $10,000,000 if aggregate property damage from all hurricanes in the state of Florida exceeds $50,000,000 during the year 2001.
A contract's payment provision specifies that the issuer will pay to the holder $10,000,000 if aggregate property damage from all hurricanes in the state of Florida exceeds $50,000,000 during the year 2001.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8| Editor's Note: The content of paragraph 815-10-55-136 will change upon transition, together with a change in the heading noted below. |
| ••> Case A: Contract Containing both a Physical Variable and a Financial Variable |
815-10-55-137
In this Case, the payment under the contract occurs if aggregate property damage from all hurricanes in the state of Florida exceeds $50,000,000 during the year 2001. The contract contains 2 underlyings—a physical variable (that is, the occurrence of at least 1 hurricane) and a financial variable (that is, aggregate property damage exceeding a specified or determinable dollar limit of $50,000,000). Because of the presence of the financial variable as an underlying, the derivative instrument does not qualify for the scope exclusion in paragraph 815-10-15-59(a).
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8If the contract contains a payment provision that requires the issuer to pay to the holder a specified dollar amount based on a financial variable, the contract is subject to the requirements of this Subtopic. In this Case, the payment under the contract occurs if aggregate property damage from all hurricanes in the state of Florida exceeds $50,000,000 during the year 2001. The contract contains 2 underlyings—a physical variable (that is, the occurrence of at least 1 hurricane) and a financial variable (that is, aggregate property damage exceeding a specified or determinable dollar limit of $50,000,000). Because of the presence of the financial variable as an underlying, the derivative instrument does not qualify for the scope exclusion in paragraph 815-10-15-59(a). 815-10-55-138
A contract specifies that the issuer pays the holder $10,000,000 in the event that a hurricane occurs in Florida in 2001.
815-10-55-139
If a contract contains a payment provision that requires the issuer to pay to the holder a specified dollar amount that is linked solely to a climatic or other physical variable (for example, wind velocity or flood-water level), paragraph 815-10-15-59(a) provides that the contract is not subject to the requirements of this Subtopic.
815-10-55-140
In this Case, the payment provision is triggered if a hurricane occurs in Florida in 2001. The underlying is a physical variable (that is, occurrence of a hurricane). Therefore, the contract qualifies for the scope exclusion in paragraph 815-10-15-59(a).
815-10-55-141
A contract would be a traditional insurance contract that is excluded from the scope of this Subtopic under the exception discussed beginning in paragraph 815-10-15-52if the contract requires a payment only if the holder incurs a decline in revenue or an increase in expense as a result of an event (for example, a hurricane) and the amount of the payoff is solely compensation for the amount of the holder's loss.
815-10-55-142
This Example addresses the application of the scope exception in paragraph 815-10-15-59(b). Entity A enters into a non-exchange-traded forward contract to buy from Entity B 100 interchangeable (fungible) units of a nonfinancial asset that are not readily convertible to cash. The contract permits net settlement through its default provisions. Entity A already owns more than 100 units of that nonfinancial asset, but Entity B does not own any units of that nonfinancial asset.
815-10-55-143
The scope exception in paragraph 815-10-15-59(b) does not apply to the accounting for the contract for both of the following reasons:
- aThe contract's settlement is based on an underlying associated with a nonfinancial asset that is not unique (because it is based on the price or value of an interchangeable, nonfinancial unit).
- bThe entity that owns the nonfinancial asset related to the underlying (that is, Entity A) is the buyer of the units and thus would benefit from the forward contract if the price or value increases.
815-10-55-143A
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The following Cases illustrate application of the scope exception in paragraph 815-10-15-59(e):- aResearch and Development Funding Arrangement—Underlyings based on the occurrence of regulatory approval and achieving an earnings target (Case A)
- bMonetization Transaction—Underlyings based on the occurrence of regulatory approval and achieving a sales target (Case B)
- cSustainability-Linked Bond—Underlying based on the failure to meet a greenhouse gas emissions reduction target (Case C)
- dLitigation Funding Arrangement between Litigant and Funder—Underlying based on the occurrence of a successful litigation outcome (Case D)
- eLitigation Funding Arrangement between Law Firm and Funder—Underlying based on the occurrence of a successful litigation outcome (Case E)
- fCommodities-Based Arrangement—Underlying based on a market price of gold (Case F)
- gVariable Payment Arrangement—Underlying based on the occurrence of regulatory approval (Case G)
- hEarnout Arrangement—Underlying based on earnings activity (Case H)
- iVariable Payment Arrangement—Underlying based on stock price differential (Case I)
- jCredit Default Swap Arrangement—Underlying based on the occurrence of a credit event by the reference entity (Case J).
815-10-55-143B
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A and Entity B enter into a research and development funding arrangement. Under the arrangement, Entity B provides funding of $50 million so that Entity A may develop and commercialize a drug compound. The arrangement has no clawback feature. Upon regulatory approval of the drug, Entity A pays $20 million to Entity B. Once the drug is commercialized, Entity A pays an additional $80 million to Entity B when gross profit related to the drug exceeds $500 million.815-10-55-143C
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement contains 2 underlyings: the occurrence of regulatory approval and an earnings measure (gross profit related to the drug exceeding $500 million). Because the occurrence of regulatory approval and gross profit relate to the drug that Entity A is developing, both of the underlyings are based on the operations or activities of Entity A. Whether the occurrence of regulatory approval is within the control of Entity A does not impact the conclusion that the underlying qualifies for the scope exception. Neither underlying is based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, those two underlyings each qualify for the scope exception in paragraph 815-10-15-59(e).815-10-55-143D
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A licenses its intellectual property to a third party to develop and commercialize a drug compound. While Entity A is not involved in the development and commercialization activities of the drug compound, the third party has agreed to pay Entity A (a) $20 million upon regulatory approval of the drug and (b) future royalties based on sales of the drug once the drug is commercialized. Entity A separately enters into an arrangement with Entity B. Under this arrangement, Entity B pays $50 million to Entity A in exchange for the right to receive a portion of both the (a) $20 million payment upon regulatory approval of the drug and (b) future royalties based on sales of the drug. Entity B is involved in the arrangement solely for investment purposes and is not involved in the development and commercialization of the drug.815-10-55-143E
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The evaluation of the scope exception in this Example focuses on the arrangement between Entity A and Entity B. That arrangement contains two underlyings: the occurrence of regulatory approval and sales of the drug. Both of the underlyings are based on the operations or activities of Entity A because in this arrangement Entity A licenses the intellectual property and receives licensing income for both the regulatory approval payment and the royalties from sales of the drug. Whether the occurrence of regulatory approval is within the control of Entity A does not impact the conclusion that the underlying qualifies for the scope exception. Neither underlying is based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, those two underlyings each qualify for the scope exception in paragraph 815-10-15-59(e). 815-10-55-143F
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8On July 1, 20X1, Entity A issues a five-year fixed-rate bond. If Entity A’s parent entity, Parent Company, fails to meet a specified greenhouse gas emissions reduction target that includes both direct and indirect greenhouse gas emissions (including upstream and downstream emissions) at the consolidated group level by June 30, 20X3, the fixed interest rate on Entity A’s bond increases by 0.25 percent for the remaining term. Entity A and Parent Company are committed to meeting the target and taking actions to reduce greenhouse gas emissions. The bond is a hybrid instrument that contains an embedded feature that is required to be evaluated for bifurcation. The embedded feature contains one underlying: the failure to meet a greenhouse gas emissions reduction target at the consolidated group level. Because Entity A is a subsidiary of Parent Company, the failure to meet the greenhouse gas emissions reduction target at the consolidated level is considered an activity specific to one of the parties to the contract for the purposes of both Entity A’s standalone financial statements and Parent Company’s consolidated financial statements. The underlying is not based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph 815-10-15-59(e). 815-10-55-143G
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A, a litigant seeking to recover patent infringement damages, enters into a funding arrangement with Entity B. Under the arrangement, Entity B provides $1 million to fund Entity A’s litigation. The arrangement has no clawback feature. Upon a successful litigation outcome, Entity A will pay Entity B 50 percent of the settlement amount that it receives from the resolution of the litigation. 815-10-55-143H
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement between Entity A and Entity B contains one underlying: the occurrence of a successful litigation outcome. The settlement amount (and the percentage of this amount) received from the resolution of the litigation is a payment provision. Because Entity A is engaged in the legal proceeding, the underlying is based on the operations or activities of Entity A. The underlying is not based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph 815-10-15-59(e).815-10-55-143I
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity C, a law firm, has been engaged to represent a litigant whereby legal fees are calculated as 30 percent of the final judgment (the settlement amount). Entity C separately enters into a funding arrangement with Entity B. Under the arrangement, Entity B provides funding of $1 million so that Entity C may hire additional staff to perform research related to the litigant’s legal proceeding. The arrangement has no clawback feature. Upon a successful litigation outcome, Entity C will pay Entity B 50 percent of the legal fees received from the litigant. 815-10-55-143J
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The evaluation of the scope exception in this Example focuses on the arrangement between Entity C and Entity B. That arrangement contains one underlying: the occurrence of a successful litigation outcome related to the litigant that Entity C is representing. The settlement amount (and the percentage of this amount) received by the litigant is a payment provision. Because Entity C is engaged to represent the litigant in the legal proceeding, the underlying is based on the operations or activities of Entity C. The underlying is not based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph 815-10-15-59(e).815-10-55-143K
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A buys and sells gold as part of its operations. Entity A enters into a contract with Entity B whereby Entity A receives an upfront payment in exchange for a specified percentage of a price increase in the market price of gold. The arrangement contains one underlying: the market price of gold. The underlying is based on a market price as described in paragraph 815-10-15-59(e)(1). Therefore, the underlying does not qualify for the scope exception in paragraph 815-10-15-59(e).815-10-55-143L
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A, a pharmaceutical company, acquires Entity B, a biotechnology start-up company that does not meet the definition of a business. As part of the transaction, Entity A and the sellers of Entity B enter into a variable payment arrangement whereby Entity A will pay the sellers of Entity B an additional $2 million upon regulatory approval of a drug compound that Entity B is developing.815-10-55-143M
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement contains one underlying: the occurrence of regulatory approval. The occurrence of regulatory approval relates to the drug that Entity B is developing as part of its operations. The underlying is not based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph 815-10-15-59(e).815-10-55-143N
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A acquires a patent from Entity B. As part of the transaction, Entity A and Entity B enter into an earnout arrangement whereby Entity A will pay Entity B $3 for each $1 that earnings before interest, taxes, depreciation, and amortization (EBITDA) associated with the manufacturing and sale of products that rely on that patent is in excess of $1 million on the 1-year anniversary of the purchase date. If EBITDA associated with the manufacturing and sale of products using the patent does not exceed $1 million, Entity A does not owe Entity B any amounts under the earnout arrangement.815-10-55-143O
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement contains one underlying: an earnings measure (EBITDA) related to the manufacturing and sale of products that rely on the patent acquired by Entity A. The underlying is not based on a market rate, market price, market index, or the price or performance (including default) of a financial asset or financial liability of one of the parties to the contract as described in paragraph 815-10-15-59(e)(1) and (e)(2). Also, the exclusions related to contracts involving an entity’s own equity or call options and put options on debt instruments as described in paragraph 815-10-15-59(e)(3) and (e)(4) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph 815-10-15-59(e). 815-10-55-143P
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A acquires Entity B (which does not meet the definition of a business) in exchange for two million shares of Entity A’s common stock. As part of the acquisition agreement, Entity A agrees to pay cash to the sellers of Entity B if the quoted market price of Entity A’s common stock is less than $100 on the 1-year anniversary of the acquisition date. Specifically, if the quoted market price of Entity A’s common stock is less than $100 on the 1-year anniversary of the acquisition date, the total amount paid in cash to the sellers of Entity B is equal to $100 minus Entity A’s common stock price on the 1-year anniversary of the acquisition date multiplied by 2 million shares.815-10-55-143Q
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement contains 1 underlying: the common stock price differential ($100 less Entity A’s common stock price at the 1-year anniversary of the acquisition date). The underlying is based on a market price as described in paragraph 815-10-15-59(e)(1). Therefore, the underlying does not qualify for the scope exception in paragraph 815-10-15-59(e). 815-10-55-143R
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8Entity A holds a debt instrument issued by Entity C. Entity A separately enters into a credit default swap arrangement with Entity B to obtain credit protection on its debt investment in Entity C (the reference entity). As part of that arrangement, Entity A makes periodic premium payments to Entity B, and, in exchange, Entity B agrees to make a cash payment to Entity A if the reference entity defaults on the debt instrument. 815-10-55-143S
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
815-10-65-8The arrangement contains one underlying: the occurrence of an event of default by the reference entity. While the underlying is not based on a market rate, market price, or market index as described in paragraph 815-10-15-59(e)(1), the underlying is based on the price or performance (including default) of a financial asset of one of the parties to the contract (the debt instrument held by Entity A) as described in paragraph 815-10-15-59(e)(2). Therefore, the underlying does not qualify for the scope exception in paragraph 815-10-15-59(e).815-10-55-144
This Example illustrates the application of paragraph 815-10-15-74(a). Assume that Entity A, whose functional currency is the U.S. dollar (USD), and the Counterparty enter into a one-year forward contract that is indexed to Entity A's common share price translated into euros (EUR) at spot rates and that will be settled in net shares of Entity A. If the value of Entity A's common stock in EUR appreciates, then Entity A will receive from the Counterparty a number of shares of Entity A stock equal to the appreciation. If the value of Entity A's stock in EUR depreciates, then Entity A will pay Counterparty a number of shares of Entity A stock equal to the depreciation. Thus, the forward contract is indexed both to Entity A's common stock and the USD/EUR currency exchange rates.
815-10-55-145
Assume further that Entity A's common stock price at inception is USD 100 per share, and the forward exchange rate of USD to EUR is 1:1.2. The strike price of the forward contract is then set at EUR 120. One year later, the share price of Entity A rises to USD 150, and the spot exchange rate of USD to EUR is 1:1. Then, the share price of Entity A translated is EUR 150. At settlement, Entity A will receive from the Counterparty 20 shares of its own common stock according to the following calculation:
- (EUR 150 - EUR 120) × 100 shares = EUR 3,000
- EUR 3,000 ÷ EUR 150 per share = 20 shares
815-10-55-146
A forward contract that is indexed to both an entity's own stock and currency exchange rates should be accounted for as a derivative instrument in its entirety by both parties to the contract if the contract in its entirety meets the definition of a derivative instrument in paragraphs .
815-10-55-147
Paragraph 815-20-25-71(a)(2) prohibits separating a derivative instrument into components based on different risks. Consequently, it would be inappropriate to bifurcate the forward contract described in this Example according to its differing exposures to changes in Entity A's stock price and changes in the USD/EUR exchange rate and then attempt to apply paragraph 815-10-15-74(a) only to the exposure to changes in Entity A's stock price. That paragraph must be applied to an entire contract.
815-10-55-148
The following Cases illustrate the accounting for a prepaid interest rate swap:
- aPrepaid interest rate swap (Case A)
- bPrepaid interest rate swap that must be bifurcated (Case B)
- cPrepaid interest rate swap variation (Case C).
815-10-55-149
Cases A, B, and C assume both parties to the contract have the same AA credit rating. If the party that is obligated to make the variable payments has a different credit rating (such as BBB), the effect of that different creditworthiness should be reflected in the discount rate used to determine the present value of the amounts payable by that party under the contract.
815-10-55-149A
Case A illustrates the application of paragraph 815-10-15-97.
815-10-55-150
Entity A pays $1,228,179 to enter into a prepaid interest rate swap contract that requires the counterparty to make quarterly payments based on a $10,000,000 effective notional amount and a variable interest rate equal to 3-month U.S. dollar- (USD-) denominated London Interbank Offered Rate (LIBOR). The prepaid interest rate swap contract is characterized as an at-the-money 2-year interest rate swap with a $10,000,000 notional amount, a fixed interest rate of 6.65 percent, and a variable interest rate of the 3-month USD LIBOR (that is, the same terms as the swap in Example 6 [see paragraph 815-30-55-24], which has a zero fair value at inception), for which the fixed leg has been fully prepaid. The amount of $1,228,179 is the present value of the 8 quarterly fixed payments of $166,250—that is, $10,000,000 x LIBOR swap rate of 6.65 percent / 4). The present value is based on the implied spot rate for each of the 8 payment dates under the assumed initial yield curve in that Example.
815-10-55-151
The prepaid interest rate swap contract could also be characterized as a 2-year, structured note (contract) with a principal amount of $1,228,179 and loan payments based on a formula equal to 8.142 times 3-month USD LIBOR. (Note that 8.142 = 10,000,000 / 1,228,179.) The terms of the structured note specify no repayment of the principal amount either over the two-year term of the structured note or at the end of its term. The 8.142 leverage factor causes the effective notional amount of the structured note also to be $10,000,000.
815-10-55-152
The prepaid interest rate swap contract meets the characteristic of a derivative instrument in paragraph 815-10-15-83(a) because it has an underlying and an effective notional amount. It also meets the characteristic of a derivative instrument in paragraph 815-10-15-83(c) because neither party is required to deliver an asset that is associated with the underlying and that has a principal amount, stated amount, face value, number of shares, or other denomination that is equal to the notional amount (see paragraph 815-10-15-100). At issue is whether the prepaid interest rate swap contract meets the characteristic of a derivative instrument described in paragraph 815-10-15-83(b) related to the initial net investment in a contract.
815-10-55-153
The prepaid interest rate swap contract does not meet the definition of a derivative instrument because it does not satisfy the characteristic of a derivative instrument described in paragraph 815-10-15-83(b) related to the initial net investment in the contract. Specifically, the prepaid interest rate swap contract is excluded from the definition of a derivative instrument by the clarifying guidance on initial net investment beginning in paragraph 815-10-15-94. The prepaid interest rate swap contract in this Case requires an initial net investment that is determined by applying the effective notional amount of $10,000,000 to the underlying (3-month USD LIBOR) for each of the 8 payment dates specified by the terms of the contract. The initial net investment of $1,228,179 required to enter into the contract is the present value of the 8 quarterly fixed-leg swap payments of $166,250—that is, $10,000,000 × 6.65 percent / 4. Because the LIBOR swap rate reflects the applicable portions of the forward three-month USD LIBOR rate curve for the settlement dates that relate to the specific payments under the swap, the initial net investment is considered to have been determined by applying the effective notional amount to the underlying and then adjusted for the time value of money.
815-10-55-154
That is, as stated in paragraph 815-10-15-97, a contract that requires an initial net investment in the contract that is in excess of the amount determined by applying the effective notional amount to the underlying is also not a derivative instrument in its entirety.
815-10-55-155
See related analysis in Case B.
815-10-55-156
Entity B pays $1,782,245 to enter into a prepaid interest rate swap contract that requires the counterparty to make quarterly payments based on a $10,000,000 effective notional amount and a variable interest rate equal to the sum of 3-month USD LIBOR and 300 basis points. The prepaid interest rate swap contract is characterized as an at-the-money 2-year interest rate swap with a $10,000,000 notional amount, a fixed interest rate of 9.65 percent, and a variable interest rate of 3-month USD LIBOR plus 300 basis points, for which the fixed leg has been fully prepaid. The amount of $1,782,245 is the present value of the 8 quarterly fixed payments of $241,250—that is, $10,000,000 x the fixed rate of 9.65 percent / 4. The present value is based on the implied spot rate for each of the 8 payment dates under the assumed initial yield curve in Example 6 (see paragraph 815-30-55-24).
815-10-55-157
In this Case, the underlying is 3-month USD LIBOR (even though the variable rate is 3-month USD LIBOR plus 300 basis points) and the amount determined by applying the effective notional amount to the underlying (and then adjusted for the time value of money) is $1,228,179, the same as in Case A. The initial net investment for the prepaid interest rate swap in this Case is $1,782,245, an amount that is in excess of $1,228,179—the amount referred to in paragraph 815-10-15-95 as being determined by applying the effective notional amount to the underlying. Consequently, the prepaid interest rate swap in this Case is not a derivative instrument in its entirety.
815-10-55-158
Because the prepaid interest rate swap contract is not a derivative instrument in its entirety, it should be evaluated to determine whether the contract contains an embedded derivative that, pursuant to paragraph 815-15-25-1, requires separate accounting as a derivative instrument.
815-10-55-159
The prepaid interest rate swap contracts in Cases A and B are hybrid instruments that are composed of a debt instrument (the host contract) and an embedded derivative based on three-month USD LIBOR.
815-10-55-160
The embedded derivative contains a provision that could result in the investor (that is, the entity receiving the variable payments) not recovering substantially all of its initial recorded investment in the hybrid instrument under its contractual terms. That is, LIBOR may possibly decrease to such a level that the investor may not recover its initial net investment.
815-10-55-161
Therefore, the embedded interest rate swap is not considered clearly and closely related to the host contract under paragraph 815-15-25-26(a) with respect to the accounting by both parties to the contract.
815-10-55-162
That paragraph states that if an embedded interest rate derivative contains a provision that permits any possibility whatsoever that the investor's (or creditor's) undiscounted net cash inflows over the life of the instrument would not enable the investor to recover substantially all of its initial recorded investment in the hybrid instrument under its contractual terms, the embedded derivative and the debt host contract are not clearly and closely related.
815-10-55-163
Therefore, unless the contracts described in Cases A and B are remeasured at fair value with changes in value recorded in earnings as they occur, both prepaid interest rate swap contracts should be bifurcated by both parties to the contract into a debt host contract whose initial carrying amount is equal to the fair value of the prepaid interest rate swap contracts ($1,228,179 and $1,782,245, respectively) and an interest rate swap whose fair value is zero at inception of the hybrid instrument, consistent with the guidance in paragraph 815-15-30-4.
815-10-55-164
The bifurcated interest rate swap contains no financing element that would require special cash flow reporting under paragraphs .
815-10-55-165
The reporting of the cash flows for the related debt host contract would be subject to the provisions of Topic 230.
815-10-55-166
Entity C pays $1,043,490 to enter into a contract that requires the counterparty to make quarterly payments based on a $10,000,000 effective notional amount and a variable interest rate equal to the 3-month USD LIBOR minus 100 basis points. In the event that 3-month USD LIBOR is less than 100 basis points, Entity C is obligated to make payments to the counterparty. The prepaid interest rate swap contract is characterized as an at-the-money 2-year interest rate swap with a $10,000,000 notional amount, a fixed interest rate of 5.65 percent, and a variable interest rate of 3-month USD LIBOR minus 100 basis points, for which the fixed leg has been fully prepaid. The amount of $1,043,490 is the present value of the 8 quarterly fixed payments of $141,250—that is, $10,000,000 x the fixed rate of 5.65 percent / 4. The present value is based on the implied spot rate for each of the 8 payment dates under the assumed initial yield curve in Example 6 (see paragraph 815-30-55-24).
815-10-55-167
In this Case, the underlying is 3-month USD LIBOR (even though the variable rate is 3-month USD LIBOR minus 100 basis points) and the amount determined by applying the effective notional amount to the underlying (and then adjusted for the time value of money) is $1,228,179, the same as in Case A. The initial net investment for the contract in this Case is $1,043,490, an amount that is less than $1,228,179. (The contract is considered not to be fully prepaid because Entity C has not prepaid all obligations imposed on it by the contract; Entity C is obligated to make future payments under certain conditions, as noted in the preceding paragraph.) The difference of $184,689 (about 15 percent) is more than a nominal amount if compared to $1,228,179. Consequently, the contract in this Case is a derivative instrument in its entirety.
815-10-55-168
The amounts in this Case are not intended to provide quantitative guidance for distinguishing between being less by more than a nominal amount and being less by only a nominal amount. The initial net investment for a contract could be less than the amount determined by applying the effective notional amount to the underlying by a percentage lower than 15 percent and still be considered to be less, by more than a nominal amount under paragraph 815-10-15-96.
815-10-55-169
Paragraph 815-10-55-63 explains that, from the perspective of the issuer of the contract, synthetic guaranteed investment contracts are derivative instruments as defined in this Subtopic. For a background discussion of synthetic guaranteed investment contracts, including a comparison with traditional and benefit-responsive guaranteed investment contracts, see paragraph 815-10-05-8. This Example illustrates the contractual terms of a synthetic guaranteed investment contract.
815-10-55-170
On January 1, 2000, ABC issues a synthetic guaranteed investment contract to the XYZ Pension Fund. XYZ has a fixed return plan option that provides participants with a guaranteed 6 percent return for a 3-year period. The plan's invested assets consist of one public, $50 million par value, 6.50 percent, AA-rated, fixed-rate, noncallable, semiannual payment bond that matures at par on December 31, 2002. (A simplistic assumption that is unrealistic because the plan would diversify its exposure by owning various bonds.) XYZ acquired the bond at par on January 1, 2000. ABC is charging XYZ 12 basis points per year on the $50 million plan balance, or $60,000 per year. Assume that the market yield applicable to this bond immediately increased to 8 percent and caused the following events to occur:
- aThe bond price decreased to $48,342,000.
- bAll plan participants requested that their funds be transferred to another plan fund.
- cXYZ exercised its put option to transfer the bond to ABC in exchange for a $50 million cash payment.
- dABC honored its synthetic guaranteed investment contract obligation and acquired the bond for $50 million.
- eXYZ used the $50 million proceeds to make the transfer of participant funds to the newly selected fund.
815-10-55-171
The following Cases illustrate when separate transactions should be viewed as a unit:
- aSwaps that should be viewed as a unit (Case A)
- bSwaps that should not be viewed as a unit (Case B).
815-10-55-172
In Cases A and B, an entity that is the issuer of fixed-rate debt enters into an interest rate swap (Swap 1) and designates it as a hedge of the fair value exposure of the debt to interest rate risk. The fair value hedge of the fixed-rate debt involving Swap 1 meets the required criteria in Section 815-20-25 to qualify for hedge accounting. The entity simultaneously enters into a second interest rate swap (Swap 2) with the same counterparty with the exact mirror terms as Swap 1 and does not designate Swap 2 as part of that hedging relationship.
815-10-55-173
If Swap 2 was entered into in contemplation of Swap 1 and the overall transaction was executed for the sole purpose of obtaining fair value accounting treatment for the debt, it should be concluded that the purpose of the transaction was not to enter into a bona fide hedging relationship involving Swap 1. In that instance, the two swaps should be viewed as a unit and the entity would not be permitted to adjust the carrying value of the debt to reflect changes in fair value attributable to interest rate risk.
815-10-55-174
If Swap 2 was not entered into in contemplation of Swap 1 or there is a substantive business purpose for structuring the transactions separately, and if both Swap 1 and Swap 2 were entered into in arm's-length transactions (that is, at market rates), then the swaps should not be viewed as a unit. For example, some entities have a policy that requires a centralized dealer subsidiary to enter into third-party derivative contracts on behalf of other subsidiaries within the entity to hedge the subsidiaries' interest rate risk exposures. The dealer subsidiary also enters into internal derivative contracts with those subsidiaries to operationally track those hedges within the entity. (As discussed beginning in paragraph 815-20-25-61, internal derivatives do not qualify in consolidated financial statements as hedging instruments for risks other than foreign exchange risk.)
815-10-55-175
The following Cases illustrate the guidance in paragraphs on whether separate transactions should be viewed as a unit for purposes of evaluating the characteristic of net settlement:
- aTwo forward contracts viewed as a unit (Case A)
- bBorrowing and lending transactions viewed as a unit (Case B).
815-10-55-176
In Cases A and B, the transactions were entered into with the same counterparty, were executed simultaneously, and relate to the same risk.
815-10-55-177
Entity A enters into a forward contract to purchase 1,500,000 units of a particular commodity in 3 months for $10 per unit. Simultaneously, Entity A enters into a forward contract to sell 1,400,000 units of the same commodity in 3 months for $10 per unit. The purchase and sale contracts are with the same counterparty. There is no market mechanism to facilitate net settlement of the contracts, and both contracts require physical delivery of the commodity at the same location in exchange for the forward price. On a gross basis, neither contract is readily convertible to cash because the market cannot rapidly absorb the specified quantities without significantly affecting the price. However, on a net basis, Entity A has a forward purchase contract for 100,000 units of the commodity, a quantity that can be rapidly absorbed by the market and thus is readily convertible to cash.
815-10-55-178
In this Case, it appears that there is no clear business purpose for structuring the transactions separately. Therefore, the facts point to the conclusion that the purchase and sale were done as a structured transaction with one counterparty to circumvent the definition of a derivative instrument under this Subtopic. However, if the facts indicated that both contracts required physical delivery of the commodity at different locations that are significantly distant from one another and each counterparty is expected to deliver the gross amount of the commodity to the other, those facts may reflect a valid substantive business purpose for the transaction.
815-10-55-179
Entity C loans $100 to Entity B. The loan has a 5-year bullet maturity and an 8 percent fixed interest rate, payable semiannually. Entity B simultaneously loans $100 to Entity C. The loan has a five-year bullet maturity and a variable interest of LIBOR, payable semiannually and reset semiannually. Entity B and Entity C enter into a netting arrangement that permits each party to offset its rights and obligations under the agreements. The netting arrangement meets the criteria for offsetting in Subtopic 210-20. The net effect of offsetting the contracts for both Entity B and Entity C is the economic equivalent of an interest rate swap arrangement, that is, one party receives a fixed interest rate from, and pays a variable interest rate to, the other.
815-10-55-180
In this Case, based on the facts presented, there is no clear business purpose for the separate transactions, and they should be accounted for as an interest rate swap under this Subtopic. However, in other instances, a clear substantive business purpose for entering into two separate loan transactions may exist (for example, as a means to overcome foreign currency expatriation restrictions).
815-10-55-181
This Example illustrates the disclosure of objectives and strategies for using derivative instruments by underlying risk, including volume of activity (see paragraph 815-10-50-1A(d)). It also illustrates the hedge basis adjustment disclosures in paragraphs 815-10-50-4EE through 50-4EEE.
- The Entity is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price risk and interest rate risk. Forward contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Entity's manufacturing process. Interest rate swaps are entered into to manage interest rate risk associated with fixed-rate loans issued by the Entity's financing subsidiary.
- FASB ASC 815-10 requires that an entity recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with that Subtopic, the Entity designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities and interest rate swaps as fair value hedges of fixed-rate receivables.
- Cash flow hedges
- For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. Gains and losses on the derivative instrument representing hedge components excluded from the assessment of effectiveness are recognized currently in earnings and are presented in the same line of the income statement expected for the hedged item.
- As of December 31, 20X2, the Entity had the following outstanding commodity forward contracts that were entered into to hedge forecasted purchases:
Commodity Number of Bushels (000s) Wheat "10,000" Corn "20,000" Oats "15,000"
- Fair value hedges
- For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. The Entity includes the gain or loss on the hedged items (that is, fixed-rate receivables) in the same line item—interest income—as the offsetting loss or gain on the related interest rate swaps.
- As of December 31, 20X2, and 20X1, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges.
"Line Item in the Statement of Financial Position in Which the Hedged Item Is Included" "Carrying Amount of the Hedged Assets/(Liabilities)" "Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)" 20X2 20X1 20X2 20X1 Loans receivable (a) $115 $124 $10 (b) $20 (a) "These amounts include the amortized cost basis of closed portfolios of loans receivable used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period . At December 31, 20X2, and 20X1, the amortized cost basis of the closed portfolios used in these hedging relationships was $52 and $60, respectively, the cumulative basis adjustments associated with these hedging relationships was $5 and $7, respectively, and the amounts of the designated hedged items were $16 and $18, respectively." (b) The balance includes $2 of hedging adjustment on a discontinued hedging relationship.
- As of December 31, 20X2, and 20X1, the total notional amount of the Entity's pay-fixed/receive-variable interest rate swaps was $79 and $82, respectively.
815-10-55-182
This Example illustrates the disclosure in tabular format of fair value amounts of derivative instruments and gains and losses on derivative instruments as required by paragraphs :
Fair Values of Derivative Instruments In millions of dollars Derivative Assets Derivative Liabilities As of December 31 2010 2009 2010 2009 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments under Subtopic 815-20 Interest rate contracts Other assets " $XX,XXX " Other assets " $XX,XXX " Other liabilities " $XX,XXX " Other liabilities " $XX,XXX " Foreign exchange contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Commodity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Credit contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Other contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Total derivatives designated as hedging instruments under Subtopic 815-20 " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Derivatives not designated as hedging instruments under Subtopic 815-20 (a) Interest rate contracts Other assets " $XX,XXX " Other assets " $XX,XXX " Other liabilities " $XX,XXX " Other liabilities " $XX,XXX " Foreign exchange contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Equity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Commodity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Credit contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Other contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Total derivatives not designated as hedging instruments under Subtopic 815-20 " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Total derivatives " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " (a) See note XX for additional information on the ABC Entity's purpose for entering into derivative instruments not designated as hedging instruments and its overall risk management strategies.
"The Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income for the Years Ended December 31, 2010 and 2009" "Derivatives in Subtopic 815-20 Hedging Relationships" "Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative" "Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (a)" Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income 2010 2009 2010 2009 Derivatives in Cash Flow Hedging Relationships Interest rate contracts " $XX,XXX " " $XX,XXX " Interest income/(expense) " $XX,XXX " " $XX,XXX " Foreign exchange contracts " XX,XXX " " XX,XXX " Sales/Revenue " XX,XXX " " XX,XXX " Commodity contracts " XX,XXX " " XX,XXX " Cost of sales " XX,XXX " " XX,XXX " Credit derivatives " XX,XXX " " XX,XXX " Other income/(expense) " XX,XXX " " XX,XXX " Other contracts " XX,XXX " " XX,XXX " Other income/(expense) " XX,XXX " " XX,XXX " Total " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Derivatives in Fair Value Hedging Relationships(b) Interest rate contracts " $XX,XXX " " $XX,XXX " Foreign exchange contracts " XX,XXX " " XX,XXX " Commodity contracts " XX,XXX " " XX,XXX " Credit derivatives " XX,XXX " " XX,XXX " Other contracts " XX,XXX " " XX,XXX " Total " $XX,XXX " " $XX,XXX " (a) "If gains and losses associated with a type of contract (for example, interest rate contracts) are displayed in multiple line items in the income statement of financial performance, the entity is required to disclose the amount included in each line item." (b) Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and periodic amortization is recorded in other comprehensive income.
"The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance for the Years Ended December 31, 20X1 and 20X0" Location and Amount of Gain or (Loss) Recognized in Income on Fair Value and Cash Flow Hedging Relationships (a) 20X1 20X0 Revenue Cost of Goods Sold Interest Income (Expense) Other Income (Expense) Revenue Cost of Goods Sold Interest Income (Expense) Other Income (Expense) Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " The effects of fair value and cash flow hedging: Gain or (loss) on fair value hedging relationships in Subtopic 815-20: Interest contracts: Hedged items " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Derivatives designated as hedging instruments " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Commodity contracts: Hedged items " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Derivatives designated as hedging instruments " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on an amortization approach " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Foreign exchange contracts: Hedged items " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Derivatives designated as hedging instruments " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on an amortization approach " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Credit contracts: Hedged items " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Derivatives designated as hedging instruments " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on an amortization approach " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Gain or (loss) on cash flow hedging relationships in Subtopic 815-20: Interest contracts: Amount of gain or (loss) reclassified from accumulated other comprehensive income into income " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Commodity contracts: Amount of gain or (loss) reclassified from accumulated other comprehensive income into income " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on changes in fair value " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Foreign exchange contracts: Amount of gain or (loss) reclassified from accumulated other comprehensive income into income " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on changes in fair value " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Credit contracts: Amount of gain or (loss) reclassified from accumulated other comprehensive income into income " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " Amount excluded from effectiveness testing recognized in earnings based on changes in fair value " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " " XX,XXX " (a) "If gains and losses associated with a type of contract (for example, interest rate contracts) are displayed in multiple line items in the income statement of financial performance, the entity is required to disclose the amount included in each line item."
Fair Values of Derivative Instruments In millions of dollars Derivative Assets Derivative Liabilities As of December 31 2010 2009 2010 2009 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments under Subtopic 815-20 Interest rate contracts Other assets " $XX,XXX " Other assets " $XX,XXX " Other liabilities " $XX,XXX " Other liabilities " $XX,XXX " Foreign exchange contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Commodity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Credit contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Other contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Total derivatives designated as hedging instruments under Subtopic 815-20 " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Derivatives not designated as hedging instruments under Subtopic 815-20 (a) Interest rate contracts Other assets " $XX,XXX " Other assets " $XX,XXX " Other liabilities " $XX,XXX " Other liabilities " $XX,XXX " Foreign exchange contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Equity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Commodity contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Credit contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Other contracts Other assets " XX,XXX " Other assets " XX,XXX " Other liabilities " XX,XXX " Other liabilities " XX,XXX " Total derivatives not designated as hedging instruments under Subtopic 815-20 " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " Total derivatives " $XX,XXX " " $XX,XXX " " $XX,XXX " " $XX,XXX " (a) See note XX for additional information on the ABC Entity's purpose for entering into derivative instruments not designated as hedging instruments and its overall risk management strategies.
815-10-55-183
The illustrative disclosure tables in the preceding paragraph provide quantitative information about derivative instruments. However, in many instances, the use of derivative instruments in an entity's risk management strategies represents only a portion of the instruments used for that purpose. As permitted in paragraph 815-10-50-4F, an entity can elect to disclose information about certain derivatives included in an entity's trading activities in separate disclosures outside the required tabular format. That paragraph states that, if that disclosure option is elected, the entity shall include a footnote in the required tables referencing the use of alternative disclosures for trading activities.
815-10-55-184
This Example illustrates one approach for presenting the quantitative information required under paragraph 815-10-50-4F when an entity elects the alternative disclosure for gains and losses on derivative instruments included in its trading activities. The Example does not address all possible ways of complying with the alternative disclosure requirements under that paragraph. Many entities already include the required information about their trading activities in other disclosures within the financial statements. Paragraph 815-10-50-4I states that, if information on derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments pursuant to paragraphs 815-20-25-58 and 815-20-25-66) is disclosed in more than a single note to financial statements, an entity shall cross-reference from the derivative instruments (or nonderivative instruments) note to other notes in which derivative-instrument-related information is disclosed.
"The Effect of Trading Activities on the Statement of Financial Performance for the Years Ended December 31, 2010, and 2009 " Trading Revenue Type of Instrument 2010 2009 Fixed income/Interest rate "$XX,XXX" "$XX,XXX" Foreign exchange " XX,XXX" "XX,XXX" Equity " XX,XXX" "XX,XXX" Commodity "XX,XXX" "XX,XXX" Credit "XX,XXX" "XX,XXX" Other "XX,XXX" "XX,XXX" Total "$XX,XXX" "$XX,XXX" Line Item in Statement Trading Revenue " of Financial Performance" 2010 2009 Principal/Proprietary transactions "$XX,XXX" "$XX,XXX" Asset management income "XX,XXX" "XX,XXX" Other income "XX,XXX" "XX,XXX" Total "$XX,XXX" "$XX,XXX" The revenue related to each category includes realized and unrealized gains and losses on both derivative instruments and nonderivative instruments.
815-10-55-185
This Example illustrates the disclosure of credit-risk-related contingent features in derivative instruments as required by paragraph 815-10-50-4H.
- Contingent Features
- Certain of the Entity's derivative instruments contain provisions that require the Entity's debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Entity's debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on December 31, 2009, is $XX million for which the Entity has posted collateral of $X million in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2009, the Entity would be required to post an additional $XX million of collateral to its counterparties.
815-10-60Relationships
Source downloaded: .Record version 0652d0a69f50. Effective date must be checked in the source.
Statement of Cash Flows
815-10-60-1
For circumstances in which cash receipts and payments include more than one class of cash flows, see paragraphs .
Compensation—Stock Compensation
815-10-60-2
For circumstances in which an instrument ceases to be subject to the requirements of Topic 718 and may become subject to the scope of this Subtopic, see paragraphs .
Fair Value Measurements and Disclosures
815-10-60-3
For an illustration of situations in which the price in a transaction involving a derivative instrument might (and might not) represent the fair value of the derivative instrument, see Example 5 (paragraph 820-10-55-46).
815-10-65Transition and Open Effective Date Information
Source downloaded: .Record version 810f878ef6ee. Effective date must be checked in the source.
815-10-65-1
Paragraph superseded on 04/13/2010 after the end of the transition period stated in FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.
815-10-65-2
Paragraph superseded on 03/23/2010 after the end of the transition period stated in FASB Staff Position No. FAS 133-1 and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.
815-10-65-3
Paragraph superseded on 07/01/2010 after the end of the transition period stated in EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock."
815-10-65-4
Paragraph superseded on 07/01/2010 after the end of the transition period stated in EITF Issue No. 08-8, "Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity's Consolidated Subsidiary."
815-10-65-5
Paragraph superseded on 03/15/2011 after the end of the transition period stated in Accounting Standards Update No. 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives.
Transition Related to Accounting Standards Update No. 2014-03, <em class="ph i">Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach</em>
815-10-65-6
The following represents the transition information related to Accounting Standards Update No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach, referenced in paragraph 815-20-25-131AA:
- a
- bUpon adoption of the simplified hedge accounting approach in this Subtopic and adoption of the guidance in paragraphs 825-10-50-3 and 825-10-50-8, that guidance shall be applied as of the beginning of the first fiscal year in which the approach is elected and in either of the following ways:
- 1Using a modified retrospective approach in which corresponding adjustments shall be made to the assets, liabilities, and opening balance of accumulated other comprehensive income and retained earnings (or other appropriate components of equity) of the current period presented to reflect application of hedge accounting under this Topic from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity.
- 2Using a full retrospective approach in which:
- iThe financial statements for each individual prior period presented shall be adjusted to reflect the period-specific effects of applying hedge accounting under this Topic from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity.
- iiCorresponding adjustments shall be made to the assets, liabilities, and opening balance of accumulated other comprehensive income and retained earnings (or other appropriate components of equity) of the earliest period presented to reflect application of hedge accounting under this Topic from the date the receive-variable, pay-fixed interest rate swap was entered into (or acquired) by the entity.
- i
- 1
- cThe simplified hedge accounting approach may be elected for any qualifying receive-variable, pay-fixed interest rate swap, whether existing at the date of its adoption or entered into after that date. The election to apply the simplified hedge accounting approach to an existing swap shall be made upon its adoption and can be applied only to existing swaps the first time the election is made. After the initial election is made to apply the simplified hedge accounting approach to existing swaps, no further retrospective applications to existing swaps (full or modified) are permitted. In determining whether an existing swap meets all of the conditions in paragraph 815-20-25-131D to qualify for applying the simplified hedge accounting approach, the condition that the swap's fair value at the time of application of this approach is at or near zero need not be considered. Instead, as long as the swap's fair value was at or near zero at the time the swap was entered into (or acquired) by the entity, the entity may apply the simplified hedge accounting approach. For an existing swap, the documentation required by paragraph 815-20-25-3 to qualify for hedge accounting must be completed in the period of adoption by the date on which the first annual financial statements are available to be issued rather than concurrently at hedge inception.
- d
- eAn entity shall provide the required disclosures in paragraphs in the period that the entity adopts the simplified hedge accounting approach in this Subtopic.
- fA private company that makes an accounting policy election to apply the simplified hedge accounting approach for the first time need not justify that the use of that approach is preferable as described in paragraph 250-10-45-2.
815-10-65-7
Paragraph superseded on 07/05/2017 after the end of the transition period stated in Accounting Standards Update No. 2015-13, Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets.
Transition Related to Accounting Standards Update No. 2025-07, <em class="ph i">Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract</em>
815-10-65-8
The following represents the transition and effective date information related to Accounting Standards Update No. 2025-07, Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract:
Effective date and early adoption
- aAll entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.
- bEarly adoption of the pending content that links to this paragraph is permitted in both interim and annual reporting periods in which financial statements have not yet been issued or made available for issuance. If an entity early adopts the pending content that links to this paragraph in an interim reporting period, it shall apply the pending content as of the beginning of the annual reporting period that includes that interim reporting period. If an entity early adopts the pending content that links to this paragraph, it also shall early adopt the pending content that links to paragraph 606-10-65-3 simultaneously.
Transition method
- cAn entity shall apply the pending content that links to this paragraph using one of the following transition methods:
- 1Prospectively to new contracts entered into on or after the date of adoption.
- 2On a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period of adoption for contracts existing as of the beginning of the annual reporting period of adoption.
- 1
- dIf an entity applies the transition method in (c)(2) and the entity had contracts or embedded features that were accounted for as derivatives but are no longer accounted for as derivatives as a result of applying the pending content that links to this paragraph, the entity has an option as of the beginning of the annual reporting period for which the pending content is adopted to elect to apply the fair value option on an instrument-by-instrument basis and measure the contract in its entirety at fair value with changes in fair value recognized in earnings if that instrument is within the scope of paragraph 825-10-15-4. For financial liabilities, an entity shall present separately in accumulated other comprehensive income the portion of the total change in the fair value of the liability that results from a change in the instrument-specific credit risk. If an entity had previously elected the fair value option for contracts that contained embedded derivatives that otherwise would have been bifurcated but are no longer required to be bifurcated as a result of applying the pending content that links to this paragraph upon adoption, the entity has an option on an instrument-by-instrument basis to revoke the fair value option as of the beginning of the annual reporting period for which the pending content is adopted and measure the contract in accordance with other generally accepted accounting principles. For those instruments for which the entity elects or revokes its election of the fair value option, the effects of initially complying with the pending content that links to this paragraph shall be reported as a cumulative-effect adjustment directly to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period in which the pending content is adopted.
Transition disclosures
- eAn entity that applies the transition method in (c)(1) shall disclose the nature of and reason for the change in accounting principle in both the interim reporting period and the annual reporting period in which the entity adopts the pending content that links to this paragraph.
- fAn entity that applies the transition method in (c)(2) shall disclose the following in both the interim reporting period and the annual reporting period in which the entity adopts the pending content that links to this paragraph:
- 1The nature of and reason for the change in accounting principle
- 2The cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the annual reporting period of adoption and a description of the financial statement line items affected by the adjustment.
- 1
815-10-S00StatusSEC
Source downloaded: .Record version f20840aebced. Effective date must be checked in the source.
815-10-S00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 815-10-S45-1 | Superseded | Accounting Standards Update No. 2010-04 | 01/15/2010 |
| 815-10-S55-1 | Superseded | Accounting Standards Update No. 2016-11 | 05/02/2016 |
| 815-10-S99-1 | Amended | Accounting Standards Update No. 2012-03 | 08/27/2012 |
| 815-10-S99-2 | Superseded | Accounting Standards Update No. 2010-04 | 01/15/2010 |
| 815-10-S99-3 | Superseded | Accounting Standards Update No. 2016-11 | 05/02/2016 |
| 815-10-S99-3 | Amended | Accounting Standards Update No. 2010-04 | 01/15/2010 |
815-10-S30Initial MeasurementSEC
Source downloaded: .Record version d4f13d99bfb7. Effective date must be checked in the source.
Written Loan Commitments Recorded at Fair Value through Earnings
815-10-S30-1
See paragraph 815-10-S99-1, SAB Topic 5.DD, for SEC Staff views regarding written loan commitments that are accounted for at fair value through earnings.
Accounting for Written Options
815-10-S30-2
See paragraph 815-10-S99-4, SEC Observer Comment: Accounting for Written Options
815-10-S35Subsequent MeasurementSEC
Source downloaded: .Record version 07683a067b4e. Effective date must be checked in the source.
Accounting for Written Options
815-10-S35-1
See paragraph 815-10-S99-4, SEC Observer Comment: Accounting for Written Options.
815-10-S45Other Presentation MattersSEC
Source downloaded: .Record version 9a50cab132db. Effective date must be checked in the source.
815-10-S50DisclosureSEC
Source downloaded: .Record version 3ba0277ac3e3. Effective date must be checked in the source.
Accounting Policies for Certain Derivative Instruments
815-10-S50-1
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(n), for disclosure requirements for accounting policies for certain derivative instruments, which also must be applied by smaller reporting companies.
815-10-S55Implementation Guidance and IllustrationsSEC
Source downloaded: .Record version 258c8b2ac378. Effective date must be checked in the source.
815-10-S99SEC MaterialsSEC
Source downloaded: .Record version d2d57cd1a05d. Effective date must be checked in the source.
SEC Staff Guidance
815-10-S99-1
The following is the text of SAB Topic 5.DD, Written Loan Commitments Recorded at Fair Value through Earnings.
- Facts: Bank A enters into a loan commitment with a customer to originate a mortgage loan at a specified rate. As part of this written loan commitment, Bank A expects to receive future net cash flows related to servicing rights from servicing fees (included in the loan's interest rate or otherwise), late charges, and other ancillary sources, or from selling the servicing rights to a third party. If Bank A intends to sell the mortgage loan after it is funded, pursuant to FASB ASC paragraph 815-10-15-83 (Derivatives and Hedging Topic), the written loan commitment is accounted for as a derivative instrument and recorded at fair value through earnings (referred to hereafter as a "derivative loan commitment"). If Bank A does not intend to sell the mortgage loan after it is funded, the written loan commitment is not accounted for as a derivative under FASB ASC Subtopic 815-10, Derivatives and Hedging—Overall. However, FASB ASC subparagraph 825-10-15-4(c) (Financial Instruments Topic), permits Bank A to record the written loan commitment at fair value through earnings (referred to hereafter as a "written loan commitment"). Pursuant to FASB ASC Subtopic 825-10, Financial Instruments—Overall, the fair value measurement for a written loan commitment would include the expected net future cash flows related to the associated servicing of the loan.
- Question 1: In measuring the fair value of a derivative loan commitment accounted for under FASB ASC Subtopic 815-10, should Bank A include the expected net future cash flows related to the associated servicing of the loan?
- Interpretive Response: Yes. The staff believes that, consistent with FASB ASC Subtopic 860-50, Transfers and Servicing—Servicing Assets and Liabilities, FN60, and FASB ASC Subtopic 825-10, the expected net future cash flows related to the associated servicing of the loan should be included in the fair value measurement of a derivative loan commitment. The expected net future cash flows related to the associated servicing of the loan that are included in the fair value measurement of a derivative loan commitment or a written loan commitment should be determined in the same manner that the fair value of a recognized servicing asset or liability is measured under FASB ASC Subtopic 860-50. However, as discussed in FASB ASC paragraph 860-50-25-1, a separate and distinct servicing asset or liability is not recognized for accounting purposes until the servicing rights have been contractually separated from the underlying loan by sale or securitization of the loan with servicing retained.
- FN60 FASB ASC Subtopic 860-50 permits an entity to subsequently measure recognized servicing assets and servicing liabilities (which are nonfinancial instruments) at fair value through earnings.
- The views in Question 1 apply to all loan commitments that are accounted for at fair value through earnings. However, for purposes of electing fair value accounting pursuant to FASB ASC Subtopic 825-10, the views in Question 1 are not intended to be applied by analogy to any other instrument that contains a nonfinancial element.
- Interpretive Response: No. The staff does not believe that internally-developed intangible assets (such as customer relationship intangible assets) should be recorded as part of the fair value of a derivative loan commitment or a written loan commitment. Such nonfinancial elements of value should not be considered a component of the related instrument. Recognition of such assets would only be appropriate in a third-party transaction. For example, in the purchase of a portfolio of derivative loan commitments in a business combination, a customer relationship intangible asset is recorded separately from the fair value of such loan commitments. Similarly, when an entity purchases a credit card portfolio, FASB ASC paragraph 310-10-25-7 (Receivables Topic) requires an allocation of the purchase price to a separately recorded cardholder relationship intangible asset.
- The view in Question 2 applies to all loan commitments that are accounted for at fair value through earnings.
815-10-S99-4
The following is the text of the SEC Observer Comment: Accounting for Written Options
- SEC staff's longstanding position is that written options that do not qualify for equity classification initially should be reported at fair value and subsequently marked to fair value through earnings.
Related subtopics
- 815-980 Regulated OperationsDerivatives and Hedging
- 815-15 Embedded DerivativesDerivatives and Hedging
- 815-40 Contracts in Entity's Own EquityDerivatives and Hedging
- 980-10 OverallRegulated Operations
- 815-944 Financial Services—InsuranceDerivatives and Hedging
- 815-25 Fair Value HedgesDerivatives and Hedging