Derivatives Implementation Group

Statement 133 Implementation Issue No. C5 [Previously No. A4]

QUESTION

Paragraph 10(e)(2) of Statement 133 explains that contracts that are not traded on an exchange are not subject to the requirements of Statement 133 if the underlying on which settlement is based is the price or value of a nonfinancial asset of one of the parties to the contract provided that the nonfinancial asset is not readily convertible to cash. Does it matter which party has the asset? For example, Company A enters into a non-exchange-traded forward contract to buy from Company B 100 interchangeable (fungible) units of a nonfinancial asset that are not readily convertible to cash. The contract permits net settlement through its default provisions. Company A already owns more than 100 units of that nonfinancial asset, but Company B does not own any units of that nonfinancial asset. Does the contract meet the scope exception in paragraph 10(e)(2) of Statement 133?

RESPONSE

The scope exception in paragraph 10(e)(2) does depend on which party has the nonfinancial asset, as discussed in #2 below. The scope exception does not apply to the accounting for the above contract for two reasons:

1. Paragraph 10(e)(2) applies only to nonfinancial assets that are unique. The contract's settlement is based on an underlying associated with a nonfinancial asset that is not unique (because it is based on the price or value of an interchangeable, nonfinancial unit).

2. The exception in paragraph 10(e)(2) applies only if the nonfinancial asset related to the underlying is owned by the party who would not benefit under the contract from an increase in the price or value of the nonfinancial asset). If the contract is an option contract, the exception in paragraph 10(e)(2) applies only if that nonfinancial asset is owned by the party who would not benefit under the contract from an increase in the price or value of the nonfinancial asset above the option's strike price. In the above example, the entity that owns the nonfinancial asset related to the underlying (that is, Company A) is the buyer of the units and thus would benefit from the forward contract if the price or value increases. Consequently, neither Company A nor Company B qualify for the exception in paragraph 10(e)(2).

The above response has been authored by the FASB staff and represents the staff's views, although the Board has discussed the above response at a public meeting and chosen not to object to dissemination of that response. Official positions of the FASB are determined only after extensive due process and deliberation.

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