# ASC 815-10-55: Derivatives and Hedging — Overall — 55 Implementation Guidance and Illustrations Source: FASB Accounting Standards Codification, Basic View [Read online](https://asc.understandingaccounting.org/asc/815/10/#55-implementation-guidance-and-illustrations) Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective. Tables and mathematical or amendment markup are retained as HTML where Markdown would lose structure. Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:083fc7a3b5da5d241674cfe4c815114e324dff63e545c84625e55a88e5f92807 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. ## ASC 815-10-55: 55 Implementation Guidance and Illustrations [Read section](https://asc.understandingaccounting.org/asc/815/10/#55-implementation-guidance-and-illustrations) SEC content: no #### Implementation Guidance ##### [815-10-55-1](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-1) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f43d06c792191c35e27fdd8411d0bbed435d33c9e0df7a34d9bfbaf913aa6b45 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Section provides guidance on the following implementation matters: 1. a Determining whether a contract is within the scope of this Subtopic 2. b Unit of accounting—a transferable option is considered freestanding, not embedded 3. c Definition of derivative instrument 4. d Instruments not within scope 5. e Scope application to certain contracts 6. f Other presentation matters 7. g Synthetic guaranteed investment contracts. 8. h [Subparagraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [815-10-55-2](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-2) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:103c322a746793c02c4418dc2fff5e1e5cc7b98ba97e7c1eb54cfa6dd57f081e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following diagram depicts the process for determining whether a [freestanding contract](https://asc.understandingaccounting.org/glossary/f/#freestanding-contract "A freestanding contract is entered into either: Separate and apart from any of the entity's other financial instruments or equity transactions In conjunction with some other transaction and is legally detachable and separately exercisable.") 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. - ![](https://asc.understandingaccounting.org/asc-img/GUID-AD2C77A1-3AAC-4DB3-AC3A-76ABDA469D30-low.gif) Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#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
The following diagram depicts the process for determining whether a [freestanding contract](https://asc.understandingaccounting.org/glossary/f/#freestanding-contract "A freestanding contract is entered into either: Separate and apart from any of the entity's other financial instruments or equity transactions In conjunction with some other transaction and is legally detachable and separately exercisable.") 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. - ![](https://asc.understandingaccounting.org/asc-img/GUID-245B7536-100A-4CD9-B2A2-8590330FCE8A-low.gif) ##### [815-10-55-3](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-3) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:22bcb12e8cb4aa732f8e4aff1308deb4feee3c9fc06896474f83cf1641bcb670 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/e/#embedded-derivative "Implicit or explicit terms that affect some or all of the cash flows or the value of other exchanges required by a contract in a manner similar to a derivative instrument.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-4) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8aa0cf437a47213782c8c7706b2283764d30e797a353498d5ead2e02d1947a4a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance addresses the following matters: 1. a Notional amount—identifying a commodity contract's notional amount 2. b Initial net investment—initial exchange under currency swap not an initial net investment 3. c Net settlement. ##### [815-10-55-5](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-5) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:872435d4576b72de1b994003b3043436ce3fba44a63a7df55458c1623f2b558b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a Contract 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). 2. b Contract 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). 3. c Contract 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). 4. d Contract 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-6) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:154f04b3f1cfc75835a9a4c6d861572d17097ab05218c39846a11d22806f4141 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-7) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f0fba7876da3ee751c91deae181946c49c3edcf4e4afa28c3b4e2c2d079cb213 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance focuses solely on whether the contracts under consideration have a [notional amount](https://asc.understandingaccounting.org/glossary/n/#notional-amount "A number of currency units, shares, bushels, pounds, or other units specified in a derivative instrument. Sometimes other names are used. For example, the notional amount is called a face amount in some contracts.") 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](https://asc.understandingaccounting.org/glossary/d/#derivative-instrument "Paragraphs 815-10-15-83815-10-15-84815-10-15-85815-10-15-86815-10-15-87815-10-15-88815-10-15-89815-10-15-90815-10-15-91815-10-15-92815-10-15-93815-10-15-94815-10-15-95815-10-15-96815-10-15-97815-10-15-98815-10-15-99815-10-15-100815-10-15-101815-10-15-102815-10-15-103815-10-15-104815-10-15-105815-10-15-106815-10-15-107815-10-15-108815-10-15-109815-10-15-110815-10-15-111815-10-15-112815-10-15-113815-10-15-114815-10-15-115815-10-15-116815-10-15-117815-10-15-118815-10-15-119815-10-15-120815-10-15-121815-10-15-122815-10-15-123815-10-15-124815-10-15-125815-10-15-126815-10-15-127815-10-15-128815-10-15-129815-10-15-130815-10-15-131815-10-15-132815-10-15-133815-10-15-134815-10-15-135815-10-15-136815-10-15-137815-10-15-138815-10-15-139 define the term 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: 1. a Contract 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. 2. b Contract 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. 3. c Contract 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. 4. d Contract 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-8) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e7eae15fb4955d17f885048ea40b86e13c1c3526efe094a4a771c18c71697a14 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-9) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9e3cf44047e6c3d36b8f661b8373c4c0967545d5f46677d2979e7ee4bafa407d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance addresses the following matters: 1. a Asymmetrical default provision does not constitute net settlement. 2. b Determining whether a structured payout constitutes net settlement. ##### [815-10-55-10](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-10) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9b1b8ca63f96d538cb93404029508db5f6ebb3ead33038466e9ad8551e13b065 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a If 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. 2. b If 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-11) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:0142f2709130cae4d3821f2b3b0f897d0b839487d17261ef57eacc0f623f937b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. For example, Buyer agreed to purchase 100 units of a commodity from Seller at $1.00 per unit: 1. a Assume 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). 2. b Similarly, 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-12) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8b0c011780f196c6e8509bf856d58f07346b32eb555a5a938f38fc731284b14a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Note that an [asymmetrical default provision](https://asc.understandingaccounting.org/glossary/a/#asymmetrical-default-provision "A nonperformance penalty provision that requires the defaulting party to compensate the nondefaulting party for any loss incurred but does not allow the defaulting party to receive the effect of favorable price changes.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-13) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9257d47187602c195c87696677d911754aa6bbe2e1c044fd0a478cc2f656383d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-14) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9e404ef6c5336b9b4bacd572fb86dd72000fce1723d28b27ce119bbed8567777 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-15) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:50ccef9b396ef36d2d0161c4a43d5e8cbfcb591ffe45d709b845e8b9d50aaa58 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a By taking delivery of the physical commodity 2. b In the event of default by Seller (which is an event beyond the control of Buyer). ##### [815-10-55-16](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-16) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:67efddb9016257e485459d76502f79d912fd0f6dc55c8bfe394b7c0e3282580d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Similarly, Seller cannot realize favorable changes in the intrinsic value of the forward contract except in either of the following circumstances: 1. a By making delivery of the physical commodity 2. b In the event of default by Buyer, which is an event beyond the control of Seller. ##### [815-10-55-17](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-17) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:bea9850a34ec0d52d1388e9482f8b4ed349a9aa6b729c97434c20fdd204f3086 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-100). ##### [815-10-55-18](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-18) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2186b9765f6a4529343d966b29c9182532a2b9d5c8c31b1ee4405db73890c877 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/u/#underlying "A specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but is not the asset or liability itself. An underlying is a variable that, along with either a notional amount or a payment provision, determines the settlement of a derivative instrument."), meets the derivative characteristic described in paragraph [815-10-15-83(c)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) and discussed in paragraph [815-10-15-100](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-19) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a55601cdd4835bfcd38b85ab1594ea3e3ac1de9c066c04122390cd92ee83a7a1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-15-104](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/glossary/f/#financial-instrument "Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity. (P) December 16, 2024; (N) December 16, 2025105-10-65-9Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. Some contractual rights (contractual obligations) that are financial instruments may not be recognized in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-100). ##### [815-10-55-20](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-20) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b9ba94b09056301a942d11f95dc7e78a6ff1a8d33089b91ff8821517857f758d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/l/#loan-commitment "Loan commitments are legally binding commitments to extend credit to a counterparty under certain prespecified terms and conditions. They have fixed expiration dates and may either be fixed-rate or variable-rate. Loan commitments can be either of the following: Revolving (in which the amount of the overall commitment is reestablished upon repayment of previously drawn amounts) Nonrevolving (in which the amount of the overall commitment is not reestablished upon repayment of previously drawn amounts).") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-105) indicates that such a contract does not meet the characteristic of net settlement in paragraph [815-10-15-100](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-100). ##### [815-10-55-21](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-21) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d0211960b471ba70b79ef6cbe8faf822dc7e97d2a88bf7993f51d904c565fc81 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, paragraph [815-10-15-106](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-22) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2f23082b3fcfe75015c985bcdb5bf148307ff16a2bff40ff60c4f09178066d97 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance addresses the following matters: 1. a Normal purchases and normal sales—application to power purchase or sales agreements 2. b Dual-trigger financial guarantee contracts 3. c Certain insurance contracts—dual-trigger property and casualty insurance contracts 4. d Derivative instrument that impedes sale accounting 5. e [Subparagraph superseded by Accounting Standards Update No. 2012-04](https://asc.understandingaccounting.org/updates/asu-2012-04/). ##### [815-10-55-23](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-23) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7a4d501bafebeed7b43337ed2950787e85013907f701bf49a862d2592890f85b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance addresses the following matters: 1. a Contracts that combine a forward contract and a purchased option contract 2. b Distinguishing between options that are capacity contracts and financial options on electricity. ##### [815-10-55-24](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-24) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:39e23990b63e568fcd8e0516bcab20cb2cbab8e238a5286b45b4c1d05a10af2a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-15-44](https://asc.understandingaccounting.org/asc/815/10/#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 [815-10-15-45 through 15-51](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-45) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-25) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:64726f2d6b4d1b4ed38fe63a68a12bb5be09947857842f91717957d7af302cca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Those fuel supply contracts are not requirements contracts that are addressed in paragraphs [815-10-55-5 through 55-7](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-5) . 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](https://asc.understandingaccounting.org/glossary/r/#readily-convertible-to-cash "Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price. (Based on paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9Assets that are readily convertible to cash have both of the following: Interchangeable (fungible) units Quoted prices available in an active market that can rapidly absorb the quantity held by the entity without significantly affecting the price.")). 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-26) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f4507525580572803b1b823cebc09612d57ba21a0ea5307155d56e37d2b479ab Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-27) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2ce796c89b0ae8c033bc42d30d3787d7e7415df1505a27dde8ed6ed94ec886b1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22)) applies to the separate forward contract. ##### [815-10-55-28](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-28) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:674481833b71ec174d62264d58f20f187ebe8aa0cfedaa158bdfd57b9a36134a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Similar to the contractual options discussed in Example 10 (see paragraph [815-10-55-121](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-29) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:685ef5fb3242f8fde3921cf050072d016413f3541ca1d6e0ca409a385c48170c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-30) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3e8e28a51975d2aa362bc65df90bbf02e3fbb4c9bd2d41504b9690aa1d7b919c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-31) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a1e4ba643bcac48d5c94e30243124ab53387708a1b5a9322884a865320168eef Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following table lists characteristics of an option that is a [capacity contract](https://asc.understandingaccounting.org/glossary/c/#capacity-contract "An agreement by an owner of capacity to sell the right to that capacity to another party so that it can satisfy its obligations. For example, in the electric industry, capacity (sometimes referred to as installed capacity) is the capability to deliver electric power to the electric transmission system of an operating control area.") and a traditional option. The characteristics listed may be relevant to the application of paragraph [815-10-15-45(a)(2)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-45). Other characteristics not listed may also be relevant. - ![](https://asc.understandingaccounting.org/asc-img/GUID-AB24A1F5-A867-4E09-8B43-18475641008B-low.gif) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-32) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5e267f40119e97b0554ec75c4c96ff7dd19794fc33cdb29ca0774fa6ba7742f7 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-33) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6e12cee7c94d185fe4ace83cb42def6ce55b0ab3a4936e2fa4fcac5f0c976e3a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a Entity ABC's actual credit losses 2. b The credit losses on a customized pool or index of consumer loans. ##### [815-10-55-34](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-34) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:37f31eadfaa4069c2267cf938286023ead41f6fbcb92244e14bb55cd93642981 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-35) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:bdd5ff9e4f7ecc57676dbbc29f9b54a0580351af073922db769c913f2ef7c7c8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-36) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d3ce46cfbefbc1fc05162ad41629b73e53db2bb96e485abf379a119bfcc420bc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Financial guarantee insurance contracts are not subject to this Subtopic only if all of the conditions in paragraph [815-10-15-58](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-58) are met. The description of the financial guarantee insurance contract in paragraph [815-10-55-32](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-58): 1. a The provision that limits any claims to the extent that Entity ABC's actual credit losses exceed a specified minimum level 2. b The 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-37) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3efa142c65dbcc68d63bdfa9bce6fc19b23ef0e8b1628e3f843ab69aec22bb49 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-38) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:73b8435531fe7222924c7aed592614ce43f391edac3a6cec1029963b2ae8d176 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-55-40](https://asc.understandingaccounting.org/asc/815/10/#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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-53) for traditional property and casualty contracts or the exception in paragraph [815-10-15-59(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-39) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:142f7f1f6ae1c5b65fd040d59c1f0e2de93dc3076da9e66cb7a51fc521fa5a95 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. In contrast, paragraph [815-15-55-12](https://asc.understandingaccounting.org/asc/815/15/#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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-55)), 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-40) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b5bd14666eb913081baebb39418bb81698d2602e7bcf369b8989366e28e42148 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Following are descriptions of seven contracts: 1. a Contract A—electric utility. A dual-trigger policy pays for a level of actual losses caused by the following two events occurring simultaneously: 1. 1 A power outage resulting from equipment failure or storm-related damage causes more than 500 megawatts of lost power. 2. 2 The 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). 2. b Contract 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. 3. c Contract 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. 4. d Contract 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. 5. e Contract 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. 6. f Contract 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. 7. g Contract 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-41) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:30c868326df9dcfbe4050e7dbe64c1821843df5e78112334242bb5b28b44d3bb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following guidance illustrates application of the scope exception (as discussed beginning in paragraph [815-10-15-63](https://asc.understandingaccounting.org/asc/815/10/#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: 1. a If 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](https://asc.understandingaccounting.org/asc/815/10/#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)](https://asc.understandingaccounting.org/asc/860/10/#860-10-40-5) 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. 2. b In 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. 3. c A 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. 4. d In a securitization [transaction](https://asc.understandingaccounting.org/glossary/t/#transaction "An external event involving transfer of something of value (future economic benefit) between two (or more) entities. (See FASB Concepts Statement No. 6, Elements of Financial Statements.)(P) December 16, 2024; (N) December 16, 2025105-10-65-9An external event involving transfer of something of value (future economic benefit) between two (or more) entities."), 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](https://asc.understandingaccounting.org/glossary/h/#hybrid-instrument "A contract that embodies both an embedded derivative and a host contract.") 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\[c\]](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1)) 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](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1). ##### [815-10-55-42](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-42) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d32dfa240cefd3990f86a817e2959492b2d27526010724406094db43228a1223 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [815-10-55-43](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-43) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6cb5883a39ff3ddcc82021ce6e5f3001a43e63737288f1f3547b18e1f3d1491d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This guidance illustrates the application of Section 815-10-15 in the following situations: 1. a Contract with payment provision 2. b Credit derivatives 3. c Equity options issued to employees and nonemployees 4. d [Subparagraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/) 5. e Repurchase agreements and wash sales 6. f Short sales (sales of borrowed securities) 7. g Take-or-pay contracts. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)This guidance illustrates the application of Section 815-10-15 in the following situations: 1. a [Subparagraph superseded by Accounting Standards Update No. 2025-07.](https://asc.understandingaccounting.org/updates/asu-2025-07/) 2. b Credit derivatives 3. c Equity options issued to employees and nonemployees 4. d [Subparagraph superseded by Accounting Standards Update No. 2018-07.](https://asc.understandingaccounting.org/updates/asu-2018-07/) 5. e Repurchase agreements and wash sales 6. f Short sales (sales of borrowed securities) 7. g Take-or-pay contracts. ##### [815-10-55-44](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-44) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:83eab411a6d7e93334d49298d1890e3937ad7423b55bded02fd95de9e5e7f549 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If the contract contains a [payment provision](https://asc.understandingaccounting.org/glossary/p/#payment-provision "A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner.") 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](https://asc.understandingaccounting.org/asc/815/10/#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
[Paragraph superseded by Accounting Standards Update No. 2025-07.](https://asc.understandingaccounting.org/updates/asu-2025-07/) ##### [815-10-55-45](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-45) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9c53be9572eeef451baa871729dfda2d1c9ddc01b13ed693906bae14fc4a909e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-46) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:54a25bb0656c3cf4f2df054a308c023e365fc4fa5a5c81f7c0e64d1182d50f2a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Some entities issue stock options to grantees in which the underlying shares are stock of an unrelated entity. Consider the following example: 1. a Entity A awards an option to a grantee. 2. b The 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. 3. c Entity B is unrelated to Entity A and, therefore, is not a subsidiary or accounted for by the equity method. ##### [815-10-55-47](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-47) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e8359708194e7d542df44d0ed6f86777144ab9c3838872ef50bbb6ffec1064f8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-48) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b4f81cb28bb54ab88669394213615ff6fe8ba28b189693c79e88bd3ce059df4e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The option award is not subject to Topic 718. Rather, the option award in the example in paragraph [815-10-55-46](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-48A) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:cfb733a7a1f211c87d165ce3f4a01ec53a304d011a736fe50bf284363e896d46 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraphs [718-10-35-9 through 35-14](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-9) 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 [718-10-35-9 through 35-14](https://asc.understandingaccounting.org/asc/718/10/#718-10-35-9) should be analyzed to determine whether the award is subject to this Subtopic. ##### [815-10-55-49](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-49) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5a11ab3e6e13edf1eed039939e0de6658c2c4b571cd09ac4dc9216f5502f9415 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). ##### [815-10-55-50](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-50) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:155d5a3c37f14f4ad2cbef63a6d2c2c6c6d50ccb0c8201e79d9f7bcae78f732a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). ##### [815-10-55-51](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-51) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6e1325e9050204dab264638213b304c5658005e5917fde657ad412563089c324 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). ##### [815-10-55-52](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-52) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7b486d519ec25d6e449b700e1272b5d0b52a37324c69c1bafcb9747502f697bf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). ##### [815-10-55-53](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-53) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1ce97765f25676e368f3965301d664ea3c7d4862481abc0b6db143c2dfa8072a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph superseded by Accounting Standards Update No. 2018-07](https://asc.understandingaccounting.org/updates/asu-2018-07/). ##### [815-10-55-54](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-54) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3045575897ed68eb3f88f6da2d23d8aa73c9b49dfc3954bc7b4ce510eb7e8934 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The exception in paragraph [815-10-15-74(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) does not apply to the holder of those derivative instruments. ##### [815-10-55-55](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-55) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5e8526c674300ba3b067e3667c6684d54382770815c2402047510f9b6c99e169 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Thus, paragraph [815-10-15-75(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-75) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-56) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1771956aabb6ce45f38a682207db5dce0133e535b43ec2e9744b8dc242db827b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Repurchase agreements and wash sales that are accounted for as sales (as described in paragraphs [860-10-55-55](https://asc.understandingaccounting.org/asc/860/10/#860-10-55-55) and [860-10-55-57](https://asc.understandingaccounting.org/asc/860/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-99), it is subject to the requirements of this Subtopic. ##### [815-10-55-57](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-57) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:965f7f010c7e062917d3c71ae1c1deea9fd42affcece50bb222e2b75b0eabb62 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a Selling a security (by the short seller to the purchaser) 2. b Borrowing a security (by the short seller from the lender) 3. c Delivering the borrowed security (by the short seller to the purchaser) 4. d Purchasing a security (by the short seller from the market) 5. e Delivering the purchased security (by the short seller to the lender). Those five activities involve three separate contracts. ##### [815-10-55-58](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-58) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:0a8fd410850a646f42fa888a966fdaa6276aff520ac87f9caf9a3bd1167c64fc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/f/#face-amount "See Notional 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 [815-10-15-94 through 15-96](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-94) .) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-59) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:264fe3dbf7093623cde1e5fb1ad6d93970b9c912d124eaccf591da9a8065cf08 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The other two contracts (one for activities in paragraph [815-10-55-57\[a\]](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-57) and in paragraph [815-10-55-57\[c\]](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-57) and the other for activity in paragraph [815-10-55-57\[d\]](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-57)) 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 [815-10-15-15 through 15-17](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-15) , it is subject to the requirements of this Subtopic. ##### [815-10-55-60](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-60) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6d19c0fc6c67d28bf929d3b5a3e864876f3ac512122678e73b26651217a205e2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Whether a [take-or-pay contract](https://asc.understandingaccounting.org/glossary/t/#take-or-pay-contract "Under a take-or-pay contract, an entity agrees to pay a specified price for a specified quantity of a product whether or not it takes delivery.") 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-79) explains that leases subject to that Topic are not subject to this Subtopic.) ##### [815-10-55-61](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-61) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:bb8b5f95a546fd96a1ce14809389ff80aac3ce4d571e2e7c018616a3703205b3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [815-10-55-62](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-62) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b10d8b8d4c40074747b083482cef72c2a169cc79ebd04b76900f7059ebd73d1f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Determining whether realized gains and losses on physically settled derivative instruments not held for [trading purposes](https://asc.understandingaccounting.org/glossary/t/#trading-purposes "The determination of what constitutes trading purposes is based on the intent of the issuer or holder and shall be consistent with the definition of trading in paragraph 320-10-25-1(a).") 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: 1. a The economic substance of the transaction 2. b The guidance set forth in Topic 845 relative to nonmonetary exchanges 3. c The principal versus agent considerations provided in paragraphs [606-10-55-36 through 55-40](https://asc.understandingaccounting.org/asc/606/10/#606-10-55-36) . ##### [815-10-55-63](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-63) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:72046e10f0bd9562297d5d3dcca86c11780ba278316b55c7decfe453ebb60989 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-05-8). Example 17 (see paragraph [815-10-55-169](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-169)) illustrates contractual terms of a synthetic guaranteed investment contracts. ##### [815-10-55-64](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-64) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3397b6547fd21c109bd892fb074bf98c8f2bf04f880e4d77ff5a527954fe4f31 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). ##### [815-10-55-65](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-65) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:381dd426c3cfc8992e32411121c9a14d684535948c896b2cbf15a3e9e572662e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. [Paragraph not used](https://asc.understandingaccounting.org/updates/page-1833002/). #### Illustrations ##### [815-10-55-66](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-66) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1eaf65bb6e819e757be2fddabbab1dc55ea5c28b64372ea9a9e4446b6b72cbe1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the application of paragraph [815-10-15-6](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-6): 1. a Attached call option (Case A) 2. b Transferable call option (Case B). ##### [815-10-55-67](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-67) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1b70b8bb49ff8be689a0d50af2051ab48eda5ccca5f811738e76d72baaec1bd1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-68) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e5303ae3b36d98b50105fc631910dfd750d6cf7427423fc307f426ad634b4eb8 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-69) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:436a541b198d6f822d1128105d6e04f3a328061ccc5b9c352ee97eb3ec7ba45d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As required by paragraph [815-10-15-6](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-70) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:38e023a7e812a8f2fe21824ddf984111c37345c073eb355a7743f70eb3fa2a37 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Case presents a group of transactions with a similar overall effect to that in Case A. ##### [815-10-55-71](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-71) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7bc81026208596999a32b873bf1ea33f507bbd88c68f565a16572b94d38d49d0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-72) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e5a8133dbe66a39fcfa6b1b1e0229e32f803fd898acc9dcf0cdb1941f4525b13 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As required by paragraph [815-10-15-6](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-73) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:0c1e5e060c644939ff56ac22c1d9035a682e6b9bd98603ccd19a827390b0d8f0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates whether a contract meets the criterion in paragraph [815-10-15-83(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-74) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e250812ea1d8f1e2b3f742da60a7801cac9e712bce34331c62e6563c80b8aa91 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-75) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6a43a7bae603391b2c8124f1285176b3aea45bf87a85b0cc6720c27eb34ff9b6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. If no prepayment is made at inception, the contract would meet the criterion in paragraph [815-10-15-83(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-76) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:0de7a22e367c951cca5ed5df0ba5e1b7ec90d5eaf429def698b3adb8b3f2ba6e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. However, the entity must assess whether that nonderivative instrument contains an embedded derivative that, pursuant to paragraph [815-15-25-1](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1), requires separate accounting as a derivative unless the fair value election is made pursuant to paragraph [815-15-25-4](https://asc.understandingaccounting.org/asc/815/15/#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](https://asc.understandingaccounting.org/asc/815/15/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-77) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1ad11b399b7f59d8d7c402e0074ddff0e96d4c338698ee0482605dedc6633d3f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the determination of an underlying if a commodity contract includes a fixed element and a variable element: 1. a A 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) 2. b A 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) 3. c A 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-78) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:10abfe0d224f13d49cc7b783676ce3ba55f5c665427c9516dffb4ed958400aeb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-119). ##### [815-10-55-79](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-79) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8b18e39cce195fe58c6e2d5b65680adabaa30a3201126c951de4a6d5132990da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This fixed-price commodity contract is a derivative instrument because it meets all the criteria in paragraph [815-10-15-83](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83), including having an underlying (namely, the price of the commodity), as required by paragraph [815-10-15-83(a)(1)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83). 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22)) applies to the contract. ##### [815-10-55-80](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-80) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9ae292a713e8a725c7a81176fbc63ad5e9a585d21a08ae5fe3686abcda990ccc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This variable-price commodity contract is a derivative instrument because it meets all the criteria in paragraph [815-10-15-83](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83), including having an underlying (namely, the price of the commodity), as required by paragraph [815-10-15-83(a)(1)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83). 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22)) applies to the contract. ##### [815-10-55-81](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-81) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9acdb15dda9fe82e55b86821daadea80fe9eb95d84cca0044146bc672112c234 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-82) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:66e247c07c9bccc7a497af4b7dc0cb17667da466ee84360980967b890e21b956 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/t/#trading "An activity involving securities sold in the near term and held for only a short period of time. The term trading contemplates a holding period generally measured in hours and days rather than months or years. See paragraph 948-310-40-1 for clarification of the term trading for a mortgage banking entity.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-83) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2a60860e7ceb9674b77e9495f06b91810bcdc30be93f7349547fcc3d73d94343 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/20/#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](https://asc.understandingaccounting.org/glossary/c/#cash-flow-hedge "A 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.") of the anticipated purchase or sale of the commodity.) ##### [815-10-55-84](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-84) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:82cf442f16d584789016caed3944e76fd257d20ecf69db033a38bbebc31ec019 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As required by paragraphs [815-10-15-110 through 15-118](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-110) and [815-10-15-119 through 15-120](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-119) , 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 [815-10-15-125 through 15-127](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-125) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-85) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:387360383157ec1bda706634df93ad4ace7ee89b0e0679416e3291c55c692c63 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the importance of ongoing evaluation: 1. a Market mechanism develops after contract inception (Case A). 2. b Initial public offering makes shares readily convertible to cash after contract inception (Case B). 3. c Increased trading activity makes shares readily convertible to cash after contract inception (Case C). 4. d Delisting makes shares not readily convertible to cash after contract inception (Case D). ##### [815-10-55-86](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-86) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6e81a09e036c84ae3879d129923bf9772302b7c62b71e35a1e48c27cf2f4aeca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-110). Accordingly, the purchase contract will have the characteristics of net settlement as defined by paragraph [815-10-15-110](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-110) as broker-dealer networks develop. ##### [815-10-55-87](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-87) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:bd2e18c0afea247deb0e09a46f0eb739c502b78efd845da1d48507fca8a1e4f3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-88) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8486ac03b02c71567b7d171052982b1702797be671711a9ce64dc3c3ce74693a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-89) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:65c26d03ec9e04c2553b9c59a7e71a06666002a89b9e5208762a6edd16e0e55c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A nontransferable forward contract on a public entity's stock meets the net settlement criteria (as discussed beginning in paragraph [815-10-15-119)](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-90) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1ca369d93368639865403162e02a873aa4ba9e3c50329040f3ea89d7284670ba Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the concept of [net share settlement](https://asc.understandingaccounting.org/glossary/n/#net-share-settlement "The party with a loss delivers to the party with a gain shares with a current fair value equal to the gain."). 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](https://asc.understandingaccounting.org/glossary/c/#cashless-exercise "See Net Share Settlement.").) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-91) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:58d7d501eae8d3373d4ef153596c6d336154d3a83178aa3ba5aa330c5fb6eb96 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate whether an ability to offset constitutes a market mechanism as discussed under paragraph [815-10-15-111(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-111): 1. a Market mechanism relieves rights and obligations (Case A). 2. b Mechanism to offset does not relieve rights and obligations (Case B). 3. c Mechanism to offset relieves rights and obligations (Case C). ##### [815-10-55-92](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-92) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:104edac9d170e3b36331b08263437a2ecc5ff3ea9bfcdd11d671fd8368320d43 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-119)). ##### [815-10-55-93](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-93) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9027876421c4d7e62a47dcbc0cd6e43da4e9ac7ca4cd1716f061194f5ac0ad9b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-94) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:0ffa9d6f436b9384b9558fdc27a41d1dfa6cff95e2eb3f06a68f711898768f2d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The arrangement is considered a market mechanism under paragraph [815-10-15-110](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-110). ##### [815-10-55-95](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-95) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:348b9039e57b6b273d0ddd152837b0a823f51ebb56e3fc401e36113ed296a37b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-96) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:65043ea186fc5061cff84548540acc31748c37f17c5b1ea795d15716cba7439f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-97) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5554697ec391599b4272f3436288b518d5f461371bcbc03b4b0c4ea46aa4d75d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-98) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:fd97ed7ae30f636dc00335f4f11d6f5492f08140382175c9901aac5ad027fbce Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-99) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3130d6b190d681b5d8225257850cab787710ab75b1e2997a3785d6f1464aae9c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a Single bond with multiple conversion options (Case A) 2. b Multiple bonds each having single conversion option (Case B). ##### [815-10-55-100](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-100) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:898e515ced97b9aa65d8392329ac8366b2334ecfdb14fe80c00d9c9a61624c10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The Cases illustrate that the form of the financial instrument is important; paragraph [815-10-15-123](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-119). Further, paragraph [815-10-15-111(c)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-111) explains that contracts shall be evaluated on an individual basis, not on an aggregate-holdings basis. ##### [815-10-55-101](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-101) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8710260925073fc0de614145f53be49f4cf3bb89c149b6d99dc358f729c1276f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a It is not exchange-traded and can be converted into common stock of the debtor, which is traded on an exchange. 2. b It has a face amount of $100 million and is convertible into 10 million shares of common stock. 3. c It may be converted in full or in increments of $1,000 immediately or at any time during the next 2 years. 4. d If it were converted in a $1,000 increment, Investor A would receive 100 shares of common stock. ##### [815-10-55-102](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-102) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:05ff8c5e0037b97ce41508bb5584bddf9484fe803739904cd89ea9e23f8e7986 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-103) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2702ba0753d534fdbfd111bab6d583f16c35bd833b7f554c2210f1f312d9ad22 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The embedded conversion option meets the criteria in paragraph [815-10-15-83(a) through (b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) but does not meet the criteria in paragraphs [815-10-15-100](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-100) and [815-10-15-110](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-104) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:690516adc092cc48c875b9f754e88960109f7b2c073288f2dc2cb9048194db07 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. It is clear that the embedded equity conversion feature is not clearly and closely related to the debt host instrument. ##### [815-10-55-105](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-105) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:831ba6a4581b3f709ae32e7fe93b705da1d25599bc07a3a7f3ab69df20c19063 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-106) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f33b5ee905fa492ee16fa4a91ea8c2c2f402cf5db0bdb4e154b64850e3d0886e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-107) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8e3a2474d2fefcb20523eebaba9d79ca5a6647d42a6edc7d2f94bbeadd0b0475 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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 [815-15-25-7 through 25-10](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-7) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-108) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f497b0511dfe86b303499e9ddd9a805e3eede7273e79688005c279da1abbe5b4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-109) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e498de03bf9c9d05edf452eb26dd2afbc38b77c3b8eac33aaa7e45dc2486c5f2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-110) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:ea8192b2a84f0faa52390d3de17bb6361bf095ee755a69d03a0d4b6a6f3ee53e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-111) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6e2f0c896b4be86e7b5b9940cd80c355d534d848fbe95c6c4067df79487dc9cb Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-112) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9a9aec787642fe3671de1ea0862b6f51477f91d111b2f23b5f6ca2c143748fdd Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The supply contract does not contain a net settlement provision as described in paragraphs [815-10-15-100 through 15-109](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-100) . ##### [815-10-55-113](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-113) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:29ad601b2c36c91c23dd71db5a1d631318eeda700a906d38005edca73d186ec5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The 5-year commodity supply contract does not meet the net settlement characteristic in paragraph [815-10-15-110](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-114) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a929d5f23297cd9dae9458e5451f2558686f4156ac95c3e12631a22b622cf1ca Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-115) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b437f6cd8a8ae23d2b106ae9db7e55d5acba6ec84909f2a4c8eda321b53430e6 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Based on the guidance in paragraph [815-10-15-3](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-116) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:3e90ec3cbc365d4e3d6713036b7898922630c55c18600fc21436915ec8ed5dee Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The five-year commodity supply contract meets the net settlement characteristic as discussed beginning in paragraph [815-10-15-119](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-117) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d9d2545188f0e39cc080b633436fbd9037e53b1fe7fe9bdabe767ff171dd5849 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22). ##### [815-10-55-118](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-118) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:756892174303047c54be08d10287653a2968b70dc16d6ceeb502b7e002a9e246 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the application of paragraph [815-10-15-17(c)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-17). 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 [815-10-15-13 through 15-20](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-13) , 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](https://asc.understandingaccounting.org/glossary/r/#regular-way-security-trades "Regular-way security trades are 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.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-119) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:94c1744413eb663e5c55d0f69d2971e93a58320bf008d9afdade13ad4b6cfc93 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-120) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:170e63aaa027ef90336d685fa415a61541c17dce35107eda7469ffaf1358c0f2 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-22). ##### [815-10-55-121](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-121) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:860dbb10ab6251dbbeea3e76c84500c0eb27d3dc372f48906368ee246b4bb0e9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-122) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:06a3a5c12246acaa367a923b0e9453616a8c62b8f196975684a07d4110a831e9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example presents three Cases of forward contracts with optionality features: 1. a Optionality feature involving price floor (cash-settled put option) written by purchaser and price cap (cash-settled call option) written by seller (Case A) 2. b Optionality feature involving cash-settled put option written by purchaser (Case B) 3. c Optionality feature involving physically settled put option written by purchaser (Case C). ##### [815-10-55-123](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-123) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7a7c4e7116876f1a7e9e6520fe1693a488a8275084b15e4f82faf63b49cb9738 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-124) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:aab8df5a77be6699e88fd4e8eeaf89e17cdf00a7e4b65a33aa4868f1b63d8b6a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22). ##### [815-10-55-125](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-125) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:4702a00c6b042760b8e3f769f3780d855a7046c9ff55e356c7ed09d87292d9ac Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-15-43](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-22) are met. ##### [815-10-55-126](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-126) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:ee6c29ca4b314dae9aa9737452d5ded4a40f248a12530d37ffa3dc311eb4755c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-127) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:bfa93fa056f42af2a2d791c39530684f0bb91ea54eb9045dc0fa1effbfb6c606 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-128) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:03dce91301cebd8fb19423bf618f6baaf2a832759a1f27b5549826d7b5244b10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-129) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6ac3ed4dc80da5a0fe4dc8a0413f5b28dca3f66302d8311cc969d256136678d5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-130) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:27e62f73c66ea84699a14ab9ac61bc93719fb5307ecfde98aaa45ca007005df9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-131) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e7ea390bea1926528121c23c2a7841d3a5180222b3f4edc3636243dc7b751552 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-132) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b6aab80414cda7c634b95982fc2d5ce48fd04bd6685071b77244bb56afe2dc71 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-40). 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. 1. a Parties: Reinsurer and Reinsured 2. b Coverage: Property losses 3. c Period: January 1, X1, through December 31, X1 4. d Retention: $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% 5. e Limit: $15 million per occurrence, $15 million per annum 6. f Premium: $1.4 million per annum. ##### [815-10-55-133](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-133) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:4c2df148d38a9b6bfb7cbe237bc809659bb54842912daecad8bd0d9009c1617a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Both of the following scenarios assume that the Dow Jones Industrial Average on January 1, X1, was 10,000. - ![](https://asc.understandingaccounting.org/asc-img/GUID-ACFF4650-B40D-4902-A4A8-B932377E886B-low.gif) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-133A) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:4b8e4d912db5388b78af8d76f8543f37ea1a5d097cfa381647cbf2949c131a57 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. As discussed in paragraph [815-10-55-38](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-38), the contract qualifies for the exception in paragraph [815-10-15-53(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-53) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-134) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:92ac63e7d2c5bcea3c45a3d2b00eccfb5a80c7b3575f29b75cc10ca7a582205a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the guidance in paragraph [815-10-15-55(c)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-55) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-135) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:c230532bca4dc42b0d20c0cd161d328a8d6723fe6c8c4c1ff9a713afd25de171 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59): 1. a Contract containing both a physical variable and a financial variable (Case A) 2. b Contract containing only a physical variable (Case B) 3. c Contract containing only a financial variable (Case C). Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#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
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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59): 1. a Contract containing both a physical variable and a financial variable (Case A) 2. b Contract containing only a physical variable (Case B) 3. c Contract containing only a financial variable (Case C). ##### [815-10-55-136](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-136) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9d93afe905932ae3c804329f4501fa34f020fd6967be8442b0c1534ea9801e8d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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
A contract's [payment provision](https://asc.understandingaccounting.org/glossary/p/#payment-provision "A payment provision specifies a fixed or determinable settlement to be made if the underlying behaves in a specified manner.") 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. ##### [815-10-55-137](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-137) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d10935a1ca717b34cd27db5d90f18594bb2f2921cea6e18d6936b2facb5b2d6c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)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. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-138](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-138) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f99d88d297eb4f6980a334c15a580c548c53d8c75fea88a46d4d8b4fa06d816b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-139) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:4405de799eb14dcfa3d645cdb65f58b4111d433d925694c7df9879d33f8b1b84 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) provides that the contract is not subject to the requirements of this Subtopic. ##### [815-10-55-140](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-140) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1400021ee428cb582217bbd57b612eff1db4c376beff822bcea1048aff09616d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-141](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-141) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6add083c53369b6a3f3e125b60237586a3a821f06ed5168e4f923d1739463dea Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. A contract would be a traditional insurance contract that is excluded from the scope of this Subtopic under the exception discussed beginning in paragraph [815-10-15-52](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-52)if 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-142) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a181b4f4008b62a6dbf0e0558e04b25eb2db84d4e85345208f4aafd5e097e8ea Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example addresses the application of the scope exception in paragraph [815-10-15-59(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:97c111ad26c52d126f92e09ece13c4a74d142cd7edeecaec206380647ffcab1e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The scope exception in paragraph [815-10-15-59(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) does not apply to the accounting for the contract for both of the following reasons: 1. a The 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). 2. b The 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. Consequently, neither Entity A nor Entity B qualifies for the scope exception in paragraph [815-10-15-59(b)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143A](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143A) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:51df2ce3740ba75645998b6224d9cd689a41e318d2dc932278ef87faeef7a257 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The following Cases illustrate application of the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59): 1. a Research and Development Funding Arrangement—Underlyings based on the occurrence of regulatory approval and achieving an earnings target (Case A) 2. b Monetization Transaction—Underlyings based on the occurrence of regulatory approval and achieving a sales target (Case B) 3. c Sustainability-Linked Bond—Underlying based on the failure to meet a greenhouse gas emissions reduction target (Case C) 4. d Litigation Funding Arrangement between Litigant and Funder—Underlying based on the occurrence of a successful litigation outcome (Case D) 5. e Litigation Funding Arrangement between Law Firm and Funder—Underlying based on the occurrence of a successful litigation outcome (Case E) 6. f Commodities-Based Arrangement—Underlying based on a market price of gold (Case F) 7. g Variable Payment Arrangement—Underlying based on the occurrence of regulatory approval (Case G) 8. h Earnout Arrangement—Underlying based on earnings activity (Case H) 9. i Variable Payment Arrangement—Underlying based on stock price differential (Case I) 10. j Credit Default Swap Arrangement—Underlying based on the occurrence of a credit event by the reference entity (Case J). ##### [815-10-55-143B](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143B) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:54ea16fdd550d10be1629d3be57c7b1c0bfc71c75f68afca3ef0b5f1b7aeea89 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143C) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b2b326e03f5470775739be17a545eb09a213b88b10cfbf260f6c4e5e85579e6a Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, those two underlyings each qualify for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143D](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143D) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a5e05a490f009a4a1215841253821db6e5c27fb679362a6834195e758cd336ff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143E) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d7a2a5337f2f93ca70b839d30e89c8501490ecc1e73746502a7f3b28fd0a40e4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, those two underlyings each qualify for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143F](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143F) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:75e0a6fc8a125e1398d60c04c2edfe25515409bedcea7acd6854770b1b69125b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)On 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143G](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143G) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9d52f6d4a25dd4b154872e390052b18089a763b0685b746eeead40984d40ac95 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143H) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:345ccc7703b6b841a513ea0691275ed4500a6bfe0a8f4336457dfbf8ba778606 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143I](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143I) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7312ecff16b0f6345f7d2325bb317917f8efd100f48b66d3abd4befd96c0f7a3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143J) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a9c29a8be36ecac4ac08783a650d05ced6ed0eb8ff18c4f2cb02621261a6fd74 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143K](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143K) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d9b08fd8afc3df672e8d8cbd30a7f9fb29cff28d6451fe06ac879d287ba9e3f3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). Therefore, the underlying does not qualify for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143L](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143L) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:608d975d67614d5e0973b2eae6ecdfd35da9fdc672354a49cf16acffbe96bcc5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143M) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1a98511de1b950ce08afeae08654de191e39c40fff5e8d6b19c28e63bcf7a4ed Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143N](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143N) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d344377bc62636f70dfa03b631a9f4850729b1079aabae3ea58a27d767bcee8b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143O) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a3b8e10a7b6f6ec1b5af6ba82f4a0a463a714fd0e818ac7870bc96135c0039ff Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59) do not apply. Therefore, the underlying qualifies for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143P](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143P) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:726f294266059822ec90095a6e806fbc1880a78219195f22e5a725affa9e1466 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143Q) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e0c17443dea66443b38d445adcbd59d71c26be5a768f479390be519cbac860a1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). Therefore, the underlying does not qualify for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-143R](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143R) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:fd7e4f2a75a58799497501fba11d843e19919edb2c412fded1df2e02897e4bd0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)Entity 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-143S) Pending content: yes Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:916ba3f01a701555c68d9ed7f90b259f97d5e407c9aa0a1638650baae59fa82c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance: [815-10-65-8](https://asc.understandingaccounting.org/asc/815/10/#815-10-65-8)The 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59), 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). Therefore, the underlying does not qualify for the scope exception in paragraph [815-10-15-59(e)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-59). ##### [815-10-55-144](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-144) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5b570ff6c3876418f45b397c419890b17b610cbb05d940ae9be50a945eac5e5d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the application of paragraph [815-10-15-74(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74). 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](https://asc.understandingaccounting.org/glossary/s/#spot-rate "The exchange rate for immediate delivery of currencies exchanged.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-145) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2c08f92045bfa985158788edc671fd97b238297d75eff87277ec8103e9274f6f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-146) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a59bcb557063f6c17024b07b652d511fa6423bf16cf522df64d9eeb4cc0b4043 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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 [815-10-15-83 through 15-139](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) . ##### [815-10-55-147](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-147) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:01521e2b439b00cc7f4dcf1dce8b55bfbb7859caf72272bcfb8459dd307bfd10 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-20-25-71(a)(2)](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-71) 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-74) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-148) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:c71fb0cd7c352a729eb3c792f8adf296cb759998b9c6f0df76fb02c2563cae17 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the accounting for a [prepaid interest rate swap](https://asc.understandingaccounting.org/glossary/p/#prepaid-interest-rate-swap "A prepaid interest rate swap contract obligates one party to make periodic payments to another party that are based on a variable interest rate applied to an effective notional amount. It is characterized as an at-the-money interest rate swap for which the fixed leg has been fully prepaid, with the result that the party that receives the variable-leg-based payments has no obligation whatsoever to make any future payments under the swap. Under that characterization, the fair value of the fixed leg and the fair value of the variable leg are equal and offsetting because the at-the-money interest rate swap has an overall fair value of zero."): 1. a Prepaid interest rate swap (Case A) 2. b Prepaid interest rate swap that must be bifurcated (Case B) 3. c Prepaid interest rate swap variation (Case C). ##### [815-10-55-149](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-149) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e9af005fa6152fc0714b929ed5a7810c3db9d6d4a56638ad1064d8e1868251c3 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-149A) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:50664d762a623ca8f3e982838ecd696018017667ba0654365f0e3bcc6426b182 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Case A illustrates the application of paragraph [815-10-15-97](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-97). ##### [815-10-55-150](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-150) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5d9d884805f4be374f854d1ae487ef709fdcc169f7ad8aa3a34465526a08b979 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/e/#effective-notional-amount "The effective notional amount is the stated notional amount adjusted for any leverage factor.") and a variable interest rate equal to 3-month U.S. dollar- (USD-) denominated [London Interbank Offered Rate (LIBOR)](https://asc.understandingaccounting.org/glossary/l/#london-interbank-offered-rate-swap-rate "The fixed rate on a single-currency, constant-notional interest rate swap that has its variable-rate leg referenced to the London Interbank Offered Rate (LIBOR) with no additional spread over LIBOR on that variable-rate leg. That fixed rate is the derived rate that would result in the swap having a zero fair value at inception because the present value of fixed cash flows, based on that rate, equate to the present value of the variable cash flows. (P) December 16, 2018; (N) December 16, 2020815-20-65-4Glossary term superseded by Accounting Standards Update No. 2018-16."). 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 \[see paragraph [815-30-55-24](https://asc.understandingaccounting.org/asc/815/30/#815-30-55-24)\], 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-151) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:23ee331e4b2f6e22054419831999f0adf1896bcdd92d5c128050e99ffa6194f5 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/e/#effective-notional-amount "The effective notional amount is the stated notional amount adjusted for any leverage factor.") of the structured note also to be $10,000,000. ##### [815-10-55-152](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-152) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:2c74f493f9d62bf516c2784c55706e6afd8406a64b00058df4eb51ff54654626 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The prepaid interest rate swap contract meets the characteristic of a derivative instrument in paragraph [815-10-15-83(a)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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](https://asc.understandingaccounting.org/asc/815/10/#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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) related to the initial net investment in a contract. ##### [815-10-55-153](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-153) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:14f7bae0a83b85b59fb14bf61bbd0c67ee2233b018f58ecd1c6a975a90169801 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-83) 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-154) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5f809179e7cdf30378d9a6c3751555d48f81309aa94287fa20116878d90eb988 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. That is, as stated in paragraph [815-10-15-97](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-155) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:c4dbfc426bf2a78d9cbc89eea04240d0356331d63a73c05b7a7bed7d918b9593 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. See related analysis in Case B. ##### [815-10-55-156](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-156) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:5fe4aa082b9428c4a4e94a23501c25b9dc5ad929e0a1a93dd1f268b0f68a2320 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/30/#815-30-55-24)). ##### [815-10-55-157](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-157) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6b4753a87ffe8741e0567eeff242c9688e7f0e3fecd54c147d50ff7fa820eeb4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-158) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:9a3875e0c8262bdf16eba337bc8350b5f4870e3bc3896d45dcd384b8fd8cc538 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-1), requires separate accounting as a derivative instrument. ##### [815-10-55-159](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-159) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6987b68f0e4455878ca5b4380a4a16c3bfb9d27b24b30934d59f4e9b1470c0d1 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-160) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7de8ca8677759d8717a79dd468b9e9cf2858d7e3edbe0a5ef0562a40272b287e Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-161) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:81c8a1543f72399a10b6591eca068bf0e53d7222d46bfd45ecfb0ed846589ebe Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Therefore, the embedded interest rate swap is not considered clearly and closely related to the host contract under paragraph [815-15-25-26(a)](https://asc.understandingaccounting.org/asc/815/15/#815-15-25-26) with respect to the accounting by both parties to the contract. ##### [815-10-55-162](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-162) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:19c9bba174c77bbc5678325059ee7dc80c591f59103f848957e8980436485f18 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-163) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f7e3c75ef65be42fa8ad1e6b1f45b53b5b9bf16aa6cd72aac65bdb869bc82c07 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/15/#815-15-30-4). ##### [815-10-55-164](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-164) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:fae510ac35525270631a0b116ebb5eb8e54d3da62a049ae92b97f2ab597d71f9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The bifurcated interest rate swap contains no financing element that would require special cash flow reporting under paragraphs [815-10-45-11 through 45-15](https://asc.understandingaccounting.org/asc/815/10/#815-10-45-11) . ##### [815-10-55-165](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-165) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:1f3742cc32528fca51d402f7ac006e31d147e0cc0214b1f95d1d7abf75adb9bf Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-166) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:927aa219281d87f1a3333e22b9ee662f26a07cf24a76453550c0a36b4a3561cc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/30/#815-30-55-24)). ##### [815-10-55-167](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-167) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a8cce12eeff7e8b8812aee5db9bd3eebf49cb56e7cc00939afcf09453ba593e0 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-168) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f12fbc40f7a28a47ff20f66baa19e971390d0dcff465c20d54cf3621bfd3db7c Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-96). ##### [815-10-55-169](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-169) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d436319a8b358f8875b77b2294e77c96645aac8bcba68c966c523e433bc66417 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. Paragraph [815-10-55-63](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-05-8). This Example illustrates the contractual terms of a synthetic guaranteed investment contract. ##### [815-10-55-170](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-170) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:878ae51f87f9d805f8f17188b462d5eeb7337f8754640a7102368002e4f5565f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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: 1. a The bond price decreased to $48,342,000. 2. b All plan participants requested that their funds be transferred to another plan fund. 3. c XYZ exercised its put option to transfer the bond to ABC in exchange for a $50 million cash payment. 4. d ABC honored its synthetic guaranteed investment contract obligation and acquired the bond for $50 million. 5. e XYZ used the $50 million proceeds to make the transfer of participant funds to the newly selected fund. ##### [815-10-55-171](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-171) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8036562b4c8d27b98f356cd59045393bf9936dd85c9e2647a8038c38f7cc69f9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate when separate transactions should be viewed as a unit: 1. a Swaps that should be viewed as a unit (Case A) 2. b Swaps that should not be viewed as a unit (Case B). ##### [815-10-55-172](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-172) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f2a65a49a280c38d097eb9c46851286599147a8fb7c9568aae1f7b5db02cbfde Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/i/#interest-rate-risk "For recognized variable-rate financial instruments and forecasted issuances or purchases of variable-rate financial instruments, interest rate risk is the risk of changes in the hedged item's cash flows attributable to changes in the contractually specified interest rate in the agreement. For recognized fixed-rate financial instruments, interest rate risk is the risk of changes in the hedged item's fair value attributable to changes in the designated benchmark interest rate. For forecasted issuances or purchases of fixed-rate financial instruments, interest rate risk is the risk of changes in the hedged item's cash flows attributable to changes in the designated benchmark interest rate."). The [fair value hedge](https://asc.understandingaccounting.org/glossary/f/#fair-value-hedge "A 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.") 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-173) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e5e900fc9c1750adef8676069e5726ac4377477a98d1ffcc2138055c7921ac3b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-174) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:b77a2398a9728f5e9080e696237731d0bc0e62a208dbe429e1e7117f7b56a13b Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/glossary/i/#internal-derivative "A foreign currency derivative instrument that has been entered into with another member of a consolidated group (such as a treasury center).") contracts with those subsidiaries to operationally track those hedges within the entity. (As discussed beginning in paragraph [815-20-25-61](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-61), internal derivatives do not qualify in consolidated financial statements as hedging instruments for risks other than [foreign exchange risk](https://asc.understandingaccounting.org/glossary/f/#foreign-exchange-risk "The risk of changes in a hedged item's fair value or functional-currency-equivalent cash flows attributable to changes in the related foreign currency exchange rates.").) ##### [815-10-55-175](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-175) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:88066c475cc5a47e4c9b57697f4c22ef1751096dadcdd3de559aa602b5b65c0f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. The following Cases illustrate the guidance in paragraphs [815-10-15-8 through 15-9](https://asc.understandingaccounting.org/asc/815/10/#815-10-15-8) on whether separate transactions should be viewed as a unit for purposes of evaluating the characteristic of net settlement: 1. a Two forward contracts viewed as a unit (Case A) 2. b Borrowing and lending transactions viewed as a unit (Case B). ##### [815-10-55-176](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-176) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:d93107261de2c0b8d06797554850e22d0213bf34f25f47923d8b6f8dfd378a12 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-177) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a7a60ce8dd9bf6bd783d8942c7b35a873863ca3821b2b9cc36d637fb54a67534 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-178) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:e58922193ff48dac82a2db688e2c6abbef10f4759508d7e38dda7b14e5091fc4 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-179) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:6cf4243e1f5701619aec8014fdaca03373a0090c22366f6e4baf30f73a921051 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-180) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:a93617f20761570ffd07a0d5ecccb080114f591c6c75232dca5ac67962544d13 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-181) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:083eb73435f372ba6cc84170997ff9dc7f0b41c9ca2339ddf012a14c459123da Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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)](https://asc.understandingaccounting.org/asc/815/10/#815-10-50-1A)). It also illustrates the hedge basis adjustment disclosures in paragraphs [815-10-50-4EE through 50-4EEE](https://asc.understandingaccounting.org/asc/815/10/#815-10-50-4EE). - 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: - ![](https://asc.understandingaccounting.org/asc-img/GUID-EEE9FD09-A733-456A-898A-226498DA0BC2-low.gif) 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. - ![](https://asc.understandingaccounting.org/asc-img/GUID-26646A8D-5F02-438D-AE54-D762BDA24A61-low.svg) "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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-182) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:8aa309ed93692667f2df14dbdb4a06e916222a5a920fca9f8e833345438ebdfc Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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 [815-10-50-4A through 50-4E](https://asc.understandingaccounting.org/asc/815/10/#815-10-50-4A) : - ![](https://asc.understandingaccounting.org/asc-img/GUID-07D92B0B-4473-4DE3-98A7-65897846D739-low.gif) 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. ![](https://asc.understandingaccounting.org/asc-img/GUID-605A4567-3334-4066-9389-B7B6F370022E-low.gif) "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. ![](https://asc.understandingaccounting.org/asc-img/GUID-396B84E4-408E-448C-964D-08CC9F3638B8-low.gif) "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." ![](https://asc.understandingaccounting.org/asc-img/GUID-21BA6904-1841-4D47-8F4A-4AD15CE7D5D9-low.gif) 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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-183) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:207601f38b83729b8885a96cd07d87aef2d9949dfa50b17d7e81d79856c1527f Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. 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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-184) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:f9dd5243b5a27bc8af3f3489d903e0459de5c0ca71977575654a75ac282f642d Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates one approach for presenting the quantitative information required under paragraph [815-10-50-4F](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/10/#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](https://asc.understandingaccounting.org/asc/815/20/#815-20-25-58) and [815-20-25-66](https://asc.understandingaccounting.org/asc/815/20/#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. - ![](https://asc.understandingaccounting.org/asc-img/GUID-72732259-D7C7-457F-838B-DFF6AC58A1BF-low.gif) "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](https://asc.understandingaccounting.org/asc/815/10/#815-10-55-185) Pending content: no Source downloaded (UTC): 2026-09-10T01:35:18.840Z to 2026-09-10T01:35:18.840Z Record version: sha256:7ebff30c6fd8ccfac92ab661a36c29316d6f9e9453f36f2292bc94e9674ea6a9 Snapshot version: sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f Effective as of: not established by retrieval timestamps. This Example illustrates the disclosure of credit-risk-related contingent features in derivative instruments as required by paragraph [815-10-50-4H](https://asc.understandingaccounting.org/asc/815/10/#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.