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11.2 Derivative definition—net settlement provisions
Publication date: 14 Oct 2019
us IFRS & US GAAP guide
More instruments will qualify as derivatives under IFRS.
Some instruments, such as option and forward agreements to buy unlisted equity investments, are accounted for as derivatives under IFRS but not under US GAAP.
US GAAP
| IFRS
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To meet the definition of a derivative, a financial instrument or other contract must require or permit net settlement.
The scope of ASC 815 excludes instruments linked to unlisted equity securities when such instruments fail the net settlement requirement and are, therefore, not accounted for as derivatives.
An option contract between an acquirer and a seller to buy or sell stock of an acquiree at a future date that results in a business combination may not meet the definition of a derivative as it may fail the net settlement requirement (e.g., the acquiree’s shares are not listed so the shares may not be readily convertible to cash).
| IFRS does not include a requirement for net settlement within the definition of a derivative. It only requires settlement at a future date.
Under IFRS, instruments linked to unlisted equity securities are required to be recorded at fair value.
An option contract between an acquirer and a seller to buy or sell stock of an acquiree at a future date that results in a business combination would be considered a derivative under IFRS 9 for the acquirer (a similar forward contract is scoped out of IFRS 9); however, the option may be classified as equity from the seller’s perspective.
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