Disclosure and presentation

party is not potentially unfavorable since it results in an increase in net 
assets/equity and cannot result in a loss to the entity. The possibility that 
existing holders of a net assets/equity interest in the entity may find the fair 
value of their interest reduced as a result of the obligation does not make the 
obligation unfavorable to the entity itself.
IE8. An option or other similar instrument acquired by an entity that gives it the 
right to reacquire its own equity instruments is not a financial asset of the 
entity. The entity will not receive cash or any other financial asset through 
exercise of the option. Exercise of the option is not potentially favorable to the 
entity since it results in a reduction in net assets/equity and an outflow of 
assets. Any change in net assets/equity recorded by the entity from 
reacquiring and canceling its own equity instruments represents a transfer 
between those holders of equity instruments who have given up their net 
assets/equity interest and those who continue to hold a net assets/equity 
interest, rather than a gain or loss by the entity. 
Derivative Financial Instruments 
IE9. On inception, derivative financial instruments give one party a contractual 
right to exchange financial assets with another party under conditions that are 
potentially favorable, or a contractual obligation to exchange financial assets 

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with another party under conditions that are potentially unfavorable. Some 
instruments embody both a right and an obligation to make an exchange. 
Since the terms of the exchange are determined on inception of the derivative 
instrument, as prices in financial markets change, those terms may become 
either favorable or unfavorable.
IE10. A put or call option to exchange financial instruments gives the holder a right 
to obtain potential future economic benefits associated with changes in the fair 
value of the financial instrument underlying the contract. Conversely, the 
writer of an option assumes an obligation to forego potential future economic 
benefits or bear potential losses of economic benefits associated with changes 
in the fair value of the underlying financial instrument. The contractual right 
of the holder and obligation of the writer meet the definition of a financial 
asset and a financial liability respectively. The financial instrument underlying 
an option contract may be any financial asset, including shares and interest-
bearing instruments. An option may require the writer to issue a debt 
instrument, rather than transfer a financial asset, but the instrument underlying 
the option would still constitute a financial asset of the holder if the option 
were exercised. The option-holder’s right to exchange the assets under 
potentially favorable conditions and the writer’s obligation to exchange the 
assets under potentially unfavorable conditions are distinct from the 
underlying assets to be exchanged upon exercise of the option. The nature of 
the holder’s right and the writer’s obligation is not affected by the likelihood 
that the option will be exercised. An option to buy or sell an asset other than a 
financial asset (such as a commodity) does not give rise to a financial asset or 
financial liability because it does not fit the requirements of the definitions for 
the receipt or delivery of financial assets or exchange of financial instruments.
IE11. Another example of a derivative financial instrument is a forward contract to 
be settled in six months’ time in which one party (the purchaser) promises to 
deliver 1,000,000 cash in exchange for 1,000,000 face amount of fixed rate 
government bonds, and the other party (the seller) promises to deliver 
1,000,000 face amount of fixed rate government bonds in exchange for 
1,000,000 cash. During the six months, both parties have a contractual right 
and a contractual obligation to exchange financial instruments. If the market 
price of the government bonds rises above 1,000,000, the conditions will be 
favorable to the purchaser and unfavorable to the seller; if the market price 
falls below 1,000,000, the effect will be the opposite. The purchaser has both 
a contractual right (a financial asset) similar to the right under a call option 
held and a contractual obligation (a financial liability) similar to the obligation 
under a put option written; the seller has a contractual right (a financial asset) 
similar to the right under a put option held and a contractual obligation (a 
financial liability) similar to the obligation under a call option written. As 
with options, these contractual rights and obligations constitute financial 
assets and financial liabilities separate and distinct from the underlying 
financial instruments (the bonds and cash to be exchanged). The significant 

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difference between a forward contract and an option contract is that both