CFM16090 - Accounting for financial instruments: IAS 32 and IAS 39: derivatives within IAS 39

Derivatives - definition

IAS 39 defines a derivative as a financial instrument or other contract with all three of the following characteristics:

• its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable (the "underlying"). In the case of a non-financial variable, that variable must not be specific to one party to the contract.
• 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, and
• it is settled at a future date.

There are some examples in CFM16090a which illustrate this definition.

The definition covers the kind of instruments normally thought of as derivatives, such as forward contracts (see CFM11070), futures ( CFM11074), swaps ( CFM11090), options ( CFM11080) and interest rate caps, collars and floors ( CFM11215).

All derivatives that are within the scope of IAS 39, except ones which are designated and effective hedging instruments, are measured at fair value, with changes in fair value recognised in the income statement. Not every contract that falls within the definition of a derivative will be within the scope of IAS 39, however – see CFM11095.