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for accounting purposes a derivative is defined based on characteristics in ance with asc 815 a derivative is a financial instrument or other contract with all of the following characteristics one the contract must have an underlying and a notional amount or payment provision or both two the contract requires no initial net investment or a small initial net investment and three the contract requires or permits net settlement if a contract is within the scope of asc 815 meets all three characteristics and is not designated in a qualifying hedging relationship then it would be recognized on the balance sheet as an asset or liability measured at fair value with all subsequent changes in fair value from period to period recognized through earnings typical contracts that meet the definition of a derivative and that would be accounted for as such are option contracts swap contracts and forward or future contracts but what about contracts that do not in their entirety meet the definition of a