Descriptions of Financial Instruments

[From Guidance on implementing IFRS 9 Financial Instruments]

B.1 Definition of a financial instrument: gold bullion

Is gold bullion a financial instrument (like cash) or is it a commodity?

It is a commodity. Although bullion is highly liquid, there is no contractual right to receive cash or another financial asset inherent in bullion.

B.2 Definition of a derivative: examples of derivatives and underlyings

What are examples of common derivative contracts and the identified underlying?

IFRS 9 defines a derivative as follows:

A derivative is a financial instrument or other contract within the scope of this Standard with all three of the following characteristics:

  1. 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, provided in the case of a nonfinancial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’).
  2. 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.
  3. It is settled at a future date.
Type of contractMain pricing-settlement variable (underlying variable)
Interest rate swapInterest rates
Currency swap (foreign exchange swap)Currency rates
Commodity swapCommodity prices
Equity swapEquity prices (equity of another entity)
Credit swapCredit rating, credit index or credit price
Total return swapTotal fair value of the reference asset and interest rates
Purchased or written treasury bond option (call or put)Interest rates
Purchased or written currency option (call or put)Currency rates
Purchased or written commodity option (call or put)Commodity prices
Purchased or written stock option (call or put)Equity prices (equity of another entity)
Interest rate futures linked to government debt (treasury futures)Interest rates
Currency futuresCurrency rates
Commodity futuresCommodity prices
Interest rate forward linked to government debt (treasury forward)Interest rates
Currency forwardCurrency rates
Commodity forwardCommodity prices
Equity forwardEquity prices (equity of another entity)

The above list provides examples of contracts that normally qualify as derivatives under IFRS 9. 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 may apply, for example, if it is a weather derivative (see paragraph B2.1 of IFRS 9), a contract to buy or sell a non-financial item such as commodity (see paragraphs 2.5–2.7 and BA.2 of IFRS 9) or a contract settled in an entity’s own shares (see paragraphs 21–24 of IAS 32). Therefore, an entity must evaluate the contract to determine whether the other characteristics of a derivative are present and whether special provisions apply.