A derivative is a financial security that has been derived from or is dependent on an underlying asset or a set of assets. Underlying assets are financial instruments (i.e. stocks, futures contracts, bonds, commodities, currencies, interest rates, and market indexes) that determine the price of derivatives. Derivatives are contracts between two or more parties, depending on the asset(s), and can be traded over-the-counter or on an exchange.
Derivatives are used for a variety of purposes such as hedging or speculating on the price of an asset. ASC 815 requires that all derivative and hedging instruments be measured and recorded at fair value. The code also gives guidance on derivative and hedging transactions, sets forth the definition of a derivative instrument, and specifies how to account for these instruments. Additionally, many derivative valuations are not done on derivatives specifically, but on financial instruments that have rights that resemble derivatives or “embedded derivatives.”
- Issuance of derivative instrument
- Purchase of derivative instrument
- Financial reporting
Due to the nature of derivatives, the valuation methods tend to be complex. An independent business valuation firm can help management teams understand and navigate the financial reporting challenges associated with ASC 815. Scalar works case by case with each client to determine the most appropriate methodology and value complicated instruments involved the derivative valuation process in order to produce the most thorough and accurate derivative valuations possible.