ipsas 29—financial instruments: recognition and measurement - IFAC

FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT
The same answer would apply if Entity A and Entity B did not have a netting agreement,
because the definition of a derivative instrument in IPSAS 29.10 does not require net
settlement.
B.6 Definition of a Derivative: Option Not Expected to be Exercised
The definition of a derivative in IPSAS 29.10 requires that the instrument “is
settled at a future date.” Is this criterion met even if an option is expected not to
be exercised, for example, because it is out of the money?
Yes. An option is settled upon exercise or at its maturity. Expiry at maturity is a form
of settlement even though there is no additional exchange of consideration.
B.7 Definition of a Derivative: Foreign Currency Contract Based on Sales
Volume
A South African entity, Entity XYZ, whose functional currency is the South
African rand, sells electricity to Mozambique denominated in US dollars. XYZ
enters into a contract with an investment bank to convert US dollars to rand at
a fixed exchange rate. The contract requires XYZ to remit rand based on its
sales volume in Mozambique in exchange for US dollars at a fixed exchange rate
of 6.00. Is that contract a derivative?
Yes. The contract has two underlying variables (the foreign exchange rate and the
volume of sales), 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 a payment provision. IPSAS 29
does not exclude from its scope derivatives that are based on sales volume.
B.8 Definition of a Derivative: Prepaid Forward
An entity enters into a forward contract to purchase shares of stock in one year
at the forward price. It prepays at inception based on the current price of the
shares. Is the forward contract a derivative?
No. The forward contract fails the “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” test for a derivative.
To illustrate: Entity XYZ enters into a forward contract to purchase one million T
ordinary shares in one year. The current market price of T is CU50 per share; the oneyear
forward price of T is CU55 per share. XYZ is required to prepay the forward
contract at inception with a CU50 million payment. The initial investment in the forward
contract of CU50 million is less than the notional amount applied to the underlying, one
million shares at the forward price of CU55 per share, i.e., CU55 million. However, the
initial net investment approximates 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 because T’s shares could be purchased at inception for the same price of CU50.
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IPSAS 29 IMPLEMENTATION GUIDANCE
PUBLIC SECTOR