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IAS 39 Definition of a Derivative

Date recorded:

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:
  • (a) whether changes in an entity's own revenue or EBITDA should be considered as financial or non-financial variables; and
  • (b) whether the exclusion from the definition of a derivative in paragraph 9 of IAS 39 of a contract linked to non-financial variables that are specific to a party to the contract is restricted to contracts accounted for under IFRS 4 Insurance Contracts.

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.

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