Scope Issues

About This Chapter

The accounting for derivatives model states that a derivative instrument is any contract that contains the following three elements.

1.The contract contains an underlying variable and a notional (principal) amount that if or when an event occurs causes variability of cash flows for one or both parties to the contract.

2.The contract has no initial net investment or an initial net investment that is smaller than other types of contracts and provides significant leveraging of returns.

3.The contract requires or permits net settlement; there are market mechanisms in place that would facilitate net settlement.

Because of this extremely broad definition of financial and nonfinancial contracts that would ...

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