Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

DEFINITION OF DERIVATIVES AS PER ACCOUNTING STANDARDS

As per US GAAP

• As per the US GAAP Accounting Standard, a derivative instrument is defined as follows: A derivative instrument is a financial instrument or other contract with all three of the following characteristics:
  • It has (1) one or more underlyings and (2) one or more notional amounts or payment provisions or both. Those terms determine the amount of the settlement or settlements, and, in some cases, whether or not a settlement is required.
  • It requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.
  • Its terms require or permit net settlement, it can readily be settled net by a means outside the contract, or it provides for delivery of an asset that puts the recipient in a position not substantially different from net settlement.

As per IFRS

As per IAS 39, the key definitions for derivatives are as follows:

A derivative is a financial instrument with the following three characteristics:

• Its value changes in response to a change in price of, or index on, a specified underlying financial or non-financial item or other variable;
• It requires no, or comparatively little, initial investment; and
• It is to be settled at a future date.

In the definition of a derivative it has been clarified that a contract will meet the definition of a derivative regardless of whether it ...