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Figure DH 2-2 summarizes whether certain contracts meet the definition of a derivative. 
Figure DH 2-2
Types of derivatives
Contract
Underlying?
Notional or payment provision?
Smaller initial net investment?
Net settlement?
Does the contract meet the definition of a derivative?
Is the contract within the scope of ASC 815?
Equity security
No
Yes
No. An initial net investment is required to purchase an equity security.
No
No
No. The contract does not meet the definition of a derivative.
Debt security or loan
No
Yes
No. A debt security or loan requires an initial net investment of the principal amount or (if purchased at a discount or premium) an amount calculated to yield a market rate of interest.
No
No
No. The contract does not meet the definition of a derivative.
Regular-way security trade (e.g., trade of a debt or equity security)
Yes, the price of the security
Yes, a specified number of securities or a specified principal or face amount
Yes
It depends on whether or not the security can be net settled through explicit contract terms or is readily convertible to cash.
It depends on whether or not there is net settlement.
Not typically. See DH 3.2.3 for discussion of the regular-way trade exception.
Forward contract to purchase or sell securities other than the equity securities of the parties involved in the transaction
Yes, the price of the security
Yes, a specified number of securities or a specified principal or face amount
Yes
It depends on whether or not the security can be net settled through explicit contract terms or is readily convertible to cash.
It depends on whether or not there is net settlement.
Yes, provided it meets the definition of a derivative and does not qualify for the regular-way security-trade scope exception. See DH 3.2.3.
Lease
Yes, the value of the leased property
Yes, its periodic rent
Yes. A benefit of a lease is that it requires a smaller initial net investment.
No. A lease requires a payment equal to the value of the right to use the property.
No
No. The contract does not meet the definition of a derivative.
Mortgage-backed security
Yes
Yes
No. This type of security requires an initial net investment equal to the fair value of the instrument.
No
No
No. The contract does not meet the definition of a derivative.
Option to purchase or sell real estate
Yes, the price of the real estate
Yes, a specified property
Yes. The option premium is less than the value of the real estate.
No, unless there are explicit market settlement terms
No
Not typically. See DH 3.2.7 for discussion of scope exception for contracts not traded on an exchange.
Option to purchase or sell an exchange-traded security
Yes, the price of the security
Yes, a specified number of securities
Yes. The option premium is less than the value of the security.
Yes. The underlying is readily convertible to cash as the security is traded on an exchange.
Yes
Yes
Option to purchase or sell a security not traded on an exchange
Yes, the price of the security
Yes, a specified number of securities
Yes. The option premium is less than the value of the security.
It depends on whether or not the security can be net settled through explicit contract terms.
It depends on whether or not there is net settlement.
Yes, provided it meets the definition of a derivative.
Employee stock option
Yes, the price of the security
Yes, a specified number of securities
Yes. The option premium is less than the value of the security.
It depends on whether or not the security can be net settled through explicit contract terms or is readily convertible to cash.
It depends on whether or not there is net settlement.
Not typically. See DH 3.3.1 for discussion of scope exception for share-based payments.
Futures contract
Yes, the price of a commodity or financial instrument
Yes, a specified quantity or face amount
Yes
Yes. A clearinghouse (a market mechanism) exists to facilitate net settlement.
Yes
Yes
Forward contract to purchase or sell manufactured goods
Yes, the price of manufactured goods
Yes, a specified quantity
Yes
It depends. The contract may be net settled if it contains symmetrical default provisions and/or the manufactured goods are readily convertible into cash.
It depends on whether or not there is net settlement.
Not typically. If the contract meets the definition of a derivative, it may qualify for the normal purchases and normal sales or contracts not traded on an exchange scope exceptions. See DH 3.2.4 and DH 3.2.7.
Nonexchange-traded forward contract to purchase or sell a commodity
Yes, the price of the commodity
Yes, a specified quantity or face amount
Yes
It depends on whether or not the contracted amount of the commodity is readily convertible to cash.
It depends on whether or not there is net settlement.
It depends. If the contract meets the definition of a derivative, it may qualify for the normal purchases and normal sales scope exception. See DH 3.2.4.
Forward contract to return securities under a repurchase agreement accounted for as a sale
Yes, the price of the security
Yes, a specified number of securities or a specified principal or face amount
Yes
It depends on whether or not the security can be net settled through explicit contract terms or is readily convertible to cash.
It depends on whether or not there is net settlement.
Yes, provided it meets the definition of a derivative and does not qualify for the regular-way security-trade scope exception. See DH 3.2.3.
Forward contract to return securities under a repurchase agreement accounted for as a secured borrowing
No. The contract is to return a pledged asset.
No
No
No
No
No. In addition, if the contract contains an embedded derivative that is an impediment to sale accounting (e.g., call option allowing transferor to repurchase transferred assets), that would also qualify for a scope exception. See DH 3.2.8.
Interest rate swap
Yes, an interest rate
Yes, a specified amount on which the exchanged interest rates are based
Yes
Yes, periodic payments
Yes
Yes
Currency swap
Yes, an exchange rate
Yes, a specified currency amount
Yes
Yes
Yes
Yes
Forward starting swap or swaption
Yes, the value of the swap
Yes, the notional amount of the swap
Yes
Yes. Settlement requires the delivery of a derivative (a swap contract).
Yes
Yes
Stock-purchase warrant
Yes, the price of stock
Yes, a specified number of shares
Yes
It depends on whether the warrant contains a net share or net cash settlement provision, can be net settled through a market mechanism or the underlying shares are readily convertible to cash.
It depends on whether or not there is net settlement.
For the holder, it is within the scope of ASC 815 if it meets the definition of a derivative.

For the issuer, even if it meets the definition of a derivative, it may qualify for the scope exception for certain contracts involving an entity’s own equity.

See DH 3.3.
Mortgage loan commitment
Yes, an interest rate
Yes, principal amount of the loan commitment
Yes
Yes, if the loan commitment can readily be settled net through terms outside of the contract or is readily convertible into cash
Yes
For the lender, yes, if the originated loan will be classified as held for sale. See DH 3.2.11.

For the borrower, no. See DH 3.2.11.
Traditional property/
casualty insurance contract
Yes, the occurrence of an identifiable insurable event
Yes, contract value (i.e., the insured amount)
Yes
Yes
Yes
No. See DH 3.2.5 for discussion of the insurance contracts scope exception.
Traditional life insurance
Yes, the mortality of the insured
Yes, contract value (i.e., the death benefit)
Yes
Yes
Yes
No. See DH 3.2.5 for discussion of the insurance contracts scope exception.
Financial guarantee contract — payment occurs if a specific debtor fails to pay the guaranteed party
Yes, failure by the debtor to make payment
Yes
Yes
Yes
Yes
It depends. See DH 3.2.6 for discussion of the financial guarantee scope exception.
Financial guarantee contract — payment occurs if there is a change in another underlying such as a decrease in a specified debtor’s creditworthiness
Yes, the decrease in specified debtor’s creditworthiness
Yes
Yes
Yes
Yes
Yes. This type of contract does not qualify for the financial guarantee scope exception.

See DH 3.2.6.
Credit-indexed contract — payment occurs if a credit index (or the creditworthiness of a specified debtor) varies in a specified way
Yes, the credit index or credit rating
Yes, a specified payment amount that may (1) vary, depending on the degree of change or (2) be fixed
Yes
Yes, for the change in fair value
Yes
Yes
Royalty agreement
Yes, the volume of sales
Yes. Payment is based on a percentage of sales/output.
Yes. Payment occurs if sales are made.
Yes
Yes
Not typically. A royalty agreement usually qualifies for the nonexchange traded contract scope exception.

See DH 3.2.7.3.
Interest rate cap
Yes, an interest rate
Yes, a specified amount
Yes
Yes
Yes
Yes
Interest rate floor
Yes, an interest rate
Yes, a specified amount
Yes
Yes
Yes
Yes
Interest rate collar
Yes, an interest rate
Yes, a specified amount
Yes
Yes
Yes
Yes
Synthetic guaranteed-investment contracts
Yes, the formula by which interest is calculated
Yes, a specified amount
Yes
Yes
Yes
Yes
Nonexchange traded contract, payment occurs if a weather variable occurs
Yes, a climatic or geologic variable or other physical attribute
Yes, a specified amount
Yes. Payment occurs if a weather variable occurs.
Yes. Payment is made in cash.
Yes
No. Climatic and geologic variables qualify for the nonexchange traded contract scope exception. See DH 3.2.7.1.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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