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| IAS 39 Financial Instruments: Definition of a Derivative – Indexation on Own EBITDA or Own Revenue |
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 Go To List of IFRIC Issues
Does a contract that is indexed to an entity's own revenue or own earnings before interest, tax, depreciation and amortisation (EBITDA) meet the definition of a derivative under IAS 39. Discussion at the IFRIC Meeting July 2006: The IFRIC accepted that it is unclear from IAS 39 whether revenue or EBITDA are financial or non-financial variables. However, the IFRIC decided not to take this issue on to its agenda as it believed it would be unable to reach a consensus on a timely basis. Discussion at the IFRIC Meeting November 2006: The IFRIC reviewed comments on the agenda decision to not to interpret the issue on whether contracts indexed on own EBITDA or own revenue would meet the definition of a derivative under IAS 39. Several respondents had raised the concern that the IFRIC had not provided guidance on what the distinction is between a non-financial and a financial variable. IFRIC members supported the concerns raised. As FASB is doing preliminary deliberations on this issue the IFRIC decided that staff should look into and discuss with FASB staff whether this issue can be solved by the IFRIC. The IFRIC decided not to confirm the agenda at this point, but decided to come back at a later stage when the staff has had a chance to discuss the time schedule for the FASB project. Discussion at the January 2007 IFRIC Meeting The IFRIC was asked to provide guidance on whether a contract that is indexed to an entity's own revenue or own earnings before interest, tax, depreciation, and amortisation (EBITDA) meets the definition of a derivative under IAS 39. In November 2006 the IFRIC decided not to confirm its tentative agenda decision on this issue, but to undertake further investigation. The staff addressed the following questions to the IFRIC:
The IFRIC agreed to recommend to the Board that it amend paragraph 9 of IAS 39 by adding guidance that the exclusion from the definition of a derivative of contracts that are linked to non-financial variables that are specific to a party to the contract only applies to insurance contracts. IFRIC decided to take no further action at this stage but to await the Board decision. Discussion at the February 2007 IASB Meeting The IFRIC had been asked to provide guidance on whether a contract that is indexed to an entity's own revenue or earnings before interest, tax, depreciation and amortisation (EBITDA) meets the definition of a derivative in accordance with paragraph 9 of IAS 39. Paragraph 9 of IAS 39 states: A derivative is a financial instrument or other contract within the scope of this Standard with all of the following characteristics: (a) 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 non-financial variable that the variable is not specific to a party to the contract... (emphasis added).The Board discussed the following questions submitted by the IFRIC:
The Board noted that the exclusion from the definition of a derivative in paragraph 9 of IAS 39 is restricted to contracts that are accounted for under IFRS 4. The Board decided to amend paragraph 9 of IAS 39 for clarification purposes. The proposed amendment was omitted from the observer notes. As a result of the proposed amendment, the definition of a derivative for the instruments in question would be met. Therefore, the Board decided not to address the question whether the underlying was financial or non-financial, as the underlying would be in the scope of IAS 39 anyway. The Board decided to include the amendment in the amendments to IFRSs resulting from its 2007 Annual Improvement Process, which the Board plans to issue on 1 October 2007 effective for period ends beginning 1 January 2009. Discussion at the January 2007 IFRIC Meeting The IFRIC was asked to provide guidance on whether a contract that is indexed to an entity's own revenue or own earnings before interest, tax, depreciation, and amortisation (EBITDA) meets the definition of a derivative under IAS 39. In November 2006 the IFRIC decided not to confirm its tentative agenda decision on this issue, but to undertake further investigation. The staff addressed the following questions to the IFRIC:
The IFRIC agreed to recommend to the Board that it amend paragraph 9 of IAS 39 by adding guidance that the exclusion from the definition of a derivative of contracts that are linked to non-financial variables that are specific to a party to the contract only applies to insurance contracts. It was decided to take no further action at this stage but to await the Board decision. Project removed from IFRIC agenda.
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