In some cases, a reporting entity will need to consider whether its derivative-related activities are trading activities. For example, some transactions involving weather derivatives (see UP 3.6.8) and natural gas virtual storage (see UP 5.3) may be considered trading activities. This section provides guidance on what types of activities are considered trading activities.

ASC 815-10-20 provides two useful definitions.

ASC 320, Investments—Debt and Equity Securities (ASC 320), also addresses trading activities. The definition of trading in ASC 320-10-25-1(a) is consistent with the definition in ASC 815-10-20. The determination of whether a derivative instrument held by a reporting entity is being held for trading purposes is a matter of judgment and will be based on the reporting entity’s intent and the specific facts and circumstances. A reporting entity is considered to be involved in trading activities related to commodity derivatives if it enters into the contracts with an objective of generating short-term profits from the contracts.

Reporting entities may also have both trading and nontrading activities. In such cases, an evaluation should be performed to understand the nature and intent of the activities to account for them appropriately. Factors for reporting entities to consider include:

In addition to the need to consider whether certain transactions are trading for accounting purposes, designation of derivatives as trading instruments will also have an impact on presentation of gains and losses in the income statement. In accordance with ASC 815-10-45-9, realized and unrealized gains and losses on trading derivatives should be presented net in the income statement. Furthermore, unless accounted for in a hedging relationship, a derivative’s realized and unrealized gains and losses should not be separately presented in the income statement, irrespective of whether the derivative is classified as trading (see DH 10.2.2 for further information).

It depends. Reporting entities evaluating the appropriate presentation of nontrading derivatives should consider the guidance provided by ASC 815-10-55-62. In accordance with this guidance, a reporting entity should consider the following factors in determining whether physically settled derivative instruments not held for trading purposes should be presented on a gross or net basis:

The income statement presentation of physically settled derivatives not held for trading purposes will depend on the specific facts and circumstances.