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:
- 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’).
- 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.
- It is settled at a future date.
|Type of contract||Main pricing-settlement variable (underlying variable)|
|Interest rate swap||Interest rates|
|Currency swap (foreign exchange swap)||Currency rates|
|Commodity swap||Commodity prices|
|Equity swap||Equity prices (equity of another entity)|
|Credit swap||Credit rating, credit index or credit price|
|Total return swap||Total 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 futures||Currency rates|
|Commodity futures||Commodity prices|
|Interest rate forward linked to government debt (treasury forward)||Interest rates|
|Currency forward||Currency rates|
|Commodity forward||Commodity prices|
|Equity forward||Equity 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.