Derivative financial instrument
A derivative is a financial instrument whose value changes in response to a specified underlying variable, generally requires little or no initial net investment relative to other contracts with similar responses, and is settled at a future date. Accounting and audit procedures depend on the instrument and applicable framework.
Worked example
An entity enters an interest-rate swap; the auditor examines the contract, valuation inputs and relevant disclosures.
Common mistake
Do not assume every derivative is a hedge for accounting purposes or that its fair value is zero at reporting date.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AAA (INT) | Supporting | September 2026–June 2027 |