Chapter CFM50230
| Published date | 16 April 2016 |
| Record Number | CFM50230 |
| The definition of a derivative contract requires that it is a {relevant contract | CFM50300}, meets the accounting conditions and does not have excluded underlying subject matter. |
The main accounting condition is satisfied if the contract is treated as a derivative under the relevant accounting standard. This will either be FRS25 or its replacement FRS102.
Meaning of ‘derivative’ under FRS 102 (from 2015)FRS102 applies for periods from 1 January 2015 and replaces FRS25 from that date. The glossary of FRS102 defines a derivative as being a financial instrument or other contract which:
- has a value that changes in response to the change in an underlying variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract,
- requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, and
- is settled at a future date.
The bulk of derivative contracts entered into by companies involve ‘plain vanilla’ interest rate or currency swaps or forwards, credit derivatives and derivatives over shares, share indices or bonds. These will all satisfy the CTA09/S579(1)(a) accounting condition.
Meaning of ‘derivative’ under FRS 25 (2004 - 2014)For periods commencing before 1 January 2015 the relevant accounting standard is FRS25. FRS25 referred to the definition of a derivative in FRS 26. There it is defined as a financial instrument or other contract which
- has a value that changes in response to a change in an underlying variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract,
- requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors, and
- is settled at a future date.
Some relevant contracts may meet the three bullet points above but fall outside of the scope of FRS 26. The main exclusions from being within the scope of FRS26 are:
- The company’s own equity instruments, and the equity components of compound financial instruments
contracts to buy or sell a non-financial item that were entered into and continue to be held for the purpose of the receipt or delivery of a...
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