Chapter 11 - Solution Manual

Paragraph 105 indicates that such a contract does not

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borrowing to obtain the benefit of that gain.) Paragraph 815-10-15-105 indicates that such a contract does not meet the characteristic of net settlement in paragraph 815-10-15-100. 55-21In contrast, paragraph 815-10-15-106 explains that a contract that requires one party to the contract to invest funds in or borrow funds from the other party so that the party in a gain position under the contract can obtain the value of that gain over time as a nontraditional adjustment of the yield on the amount invested or the interest element on the amount borrowed may meet the characteristic of net settlement in paragraph 815-10-15-100. For example, if a contract required the party in a gain position under the contract to invest $100 in the other party’s debt instrument that paid an abnormally high
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239 interest rate of 5,000 percent per day for a term whose length is dependent on the changes in the contract’s underlying, an analysis of those terms would lead to the conclusion that the contract’s settlement terms were in substance a structured payout of the contract’s gain and thus that contract would be considered to have met the characteristic of net settlement in that paragraph. > > Instruments Not Within Scope 55-22This guidance addresses the following matters: a. Normal purchases and normal sales—application to power purchase or sales agreements b. Dual-trigger financial guarantee contracts c. Certain insurance contracts—dual-trigger property and casualty insurance contracts d. Derivative instrument that impedes sale accounting e. Loan commitment types. > > > Normal Purchases and Normal Sales—Application to Power Purchase or Sales Agreements 55-23This guidance addresses the following matters: a. Contracts that combine a forward contract and a purchased option contract b. Distinguishing between options that are capacity contracts and financial options on electricity. > > > > Contracts that Combine a Forward Contract and a Purchased Option Contract 55-24Paragraph 815-10-15-44 states that the inclusion of a purchased option that would, if exercised, require delivery of the related asset at an established price under the contract within a single contract that meets the definition of a derivative instrument disqualifies the entire contract from being eligible to qualify for the normal purchases and normal sales scope exception in this Subsection except as provided in paragraphs 815-10-15-45 through 15-51 with respect to certain power purchase or sales agreements. Although the guidance that follows discusses such circumstances in the context of utilities and independent power producers, it applies to all entities that enter into contracts that combine a forward contract and a purchased option contract, not just to utilities and independent power producers. Some utilities and independent power producers have fuel supply contracts that require delivery of a contractual minimum quantity of fuel at a fixed price and have an option that permits the holder to take specified additional amounts of fuel at the same fixed price at various times. Essentially, that option to
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