What is Derivatives Accounting?
A derivative is a financial instrument whose value derives from the value of an underlying asset, index, or rate, such as a forward contract, option, swap, or future. Under IFRS 9, derivatives are measured at fair value through profit or loss unless they qualify and are designated for hedge accounting.
How It Works
- Identify the contract and check if it meets the IFRS 9 definition of a derivative (value derived from underlying, little or no initial investment, settled in the future).
- Recognise the derivative on the balance sheet at fair value on inception.
- Remeasure to fair value at each reporting date with changes in profit or loss, unless hedge accounting is applied.
- Disclose risk management strategy, contract terms, and fair value hierarchy levels.
Saudi Context
Saudi banks and corporates use derivatives such as profit-rate swaps and FX forwards under SAMA-supervised structures. Many products are structured in sharia-compliant forms. Saudi reporters follow IFRS 9 with ZATCA accepting fair value gains and losses as taxable items where applicable.
Example
A Saudi importer signs a 6-month FX forward to buy USD 1 million at SAR 3.78. At year-end the spot rate is SAR 3.80; the unrealised gain of SAR 20,000 is recognised at fair value through profit or loss.