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Chapter 11 - Solution Manual

Instruments not within this guidance addresses the

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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 take more fuel is a purchased option that is combined with the forward contract in a single supply contract. Typically, the option to take additional fuel is built into the contract to ensure that the buyer has a supply of fuel to produce the electricity during peak demands; however, the buyer may have the ability to sell to third parties the additional fuel purchased through exercise of the purchased option. Due to the difficulty in estimating peak electricity load and thus the amount of fuel needed to generate the required electricity, those fuel supply contracts are common in the electric utility industry (though similar supply contracts may exist in other industries). 55-25Those fuel supply contracts are not requirements contracts that are addressed in paragraphs 815- 10-55-5 through 55-7. Many of those contracts meet the definition of a derivative instrument because they have a notional amount and an underlying, require no or a smaller initial net investment, and
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