Derivatives Implementation Group

Statement 133 Implementation Issue No. C12

QUESTION

Can the application of the normal purchases and normal sales exception to a contract that meets both the definition of a derivative and the criteria in paragraph 10(b) effectively be interpreted as an election based on whether or not the entity chooses to document the basis for concluding that it is probable that the contract will result in physical delivery?

BACKGROUND

Paragraph 10(b) of Statement 133, as amended by Statement 149, states, in part:

    For contracts that qualify for the normal purchases and normal sales exception, the entity shall document the designation of the contract as a normal purchase or normal sale. For contracts that qualify for the normal purchases and normal sales exception under paragraphs 10(b)(1) and 10(b)(3), the entity shall document the basis for concluding that it is probable that the contract will not settle net and will result in physical delivery. For contracts that qualify for the normal purchases and normal sales exception under paragraph 10(b)(4), the entity shall document the basis for concluding that the agreement meets the criteria in paragraph 58(b). The documentation requirements can be applied either to groups of similarly designated contracts or to each individual contract. Failure to comply with the documentation requirements precludes application of the normal purchases and normal sales exception to contracts that would otherwise qualify for that exception.

Without the required documentation completed, derivative contracts that would otherwise qualify for the scope exception in paragraph 10(b) would be subject to the requirements of Statement 133. Some have suggested that an entity’s ability to choose whether or not to deliberately fail to comply with that documentation requirement effectively constitutes an election.

RESPONSE

Yes. The normal purchases and normal sales exception in paragraph 10(b) could effectively be interpreted as an election in all cases. However, once an entity documents compliance with the requirements of paragraph 10(b), which could be done at the inception of the contract or at a later date, the entity is not permitted at a later date to change its election and treat the contract as a derivative.

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.