ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
Main pricing-settlement variable
Type of contract
(underlying variable)
(treasury futures)
Currency futures Currency rates
Commodity futures Commodity prices
Interest rate forward linked to government Interest rates
debt (treasury forward)
Currency forward Currency rates
Commodity forward Commodity prices
Equity forward Equity prices (equity instruments of another
entity)
The above list provides examples of contracts that normally qualify as derivatives
under IPSAS 29. The list is not exhaustive. Any contract that has an underlying may
be a derivative. Moreover, even if an instrument meets the definition of a derivative
contract, special provisions of IPSAS 29 may apply, for example, if it is a weather
derivative (see IPSAS 29.AG5), a contract to buy or sell a non-financial item such as
commodity (see IPSAS 29.4 and IPSAS 29.AG22) or a contract settled in an entity’s
own shares (see IPSAS 28.25–IPSAS 28.29). Therefore, an entity must evaluate the
contract to determine whether the other characteristics of a derivative are present and
whether special provisions apply.
B.2 Definition of a Derivative: Settlement at a Future Date, Interest Rate Swap
with Net or Gross Settlement
For the purpose of determining whether an interest rate swap is a derivative
financial instrument under IPSAS 29, does it make a difference whether the
parties pay the interest payments to each other (gross settlement) or settle on a
net basis?
No. The definition of a derivative does not depend on gross or net settlement.
To illustrate: Entity ABC enters into an interest rate swap with a counterparty (XYZ)
that requires ABC to pay a fixed rate of 8 percent and receive a variable amount
based on three-month LIBOR, reset on a quarterly basis. The fixed and variable
amounts are determined based on a CU100 million notional amount. ABC and XYZ
do not exchange the notional amount. ABC pays or receives a net cash amount each
quarter based on the difference between 8 percent and three-month LIBOR.
Alternatively, settlement may be on a gross basis.
The contract meets the definition of a derivative regardless of whether there is net or
gross settlement because its value changes in response to changes in an underlying
variable (LIBOR), there is no initial net investment, and settlements occur at future
dates.
IPSAS 29 IMPLEMENTATION GUIDANCE 1160