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Chapter 11

Derivatives

7.1 Definitions

IFRS 9 says that a derivative is a financial instrument with all of the
following characteristics:

 Its value changes in response to the value changes of an
underlying item (such as commodity prices)

 It requires little or no initial investment

 It is settled at a future date.

Common derivatives are futures, forwards, swaps, and options.

A contract to buy or sell a non-financial item (such as inventory or property, plant and
equipment) is only a derivative if:

 It can be settled net in cash or by exchanging another financial instrument, and

 The contract was not entered into for the purpose of receipt or delivery of the
item to meet the entity's operating requirements.

7.2 Accounting treatment

Derivatives are categorised to be measured at fair value through profit or loss.
This means that:

 They are initially recognised at fair value (normally the price paid) with any
transaction costs (such as legal or broker fees) expensed to profit or loss.

 They are subsequently remeasured to fair value at each reporting date with
any gain or loss on remeasurement recorded in the statement of profit or loss.

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