Question 1: Derivatives and Scope a) Firm A enters into 100 crude oil forward contracts. By means of these contracts Firm A buys a certain quantity of crude oil at a fixed price per barrel (no initial payment, settlement 6 months from today). The contracts permit but do not require net settlement. The quantity of crude oil specified in the forward contracts is consistent with the amount of oil received and consumed during the same timeframe in the prior calendar year, which is also broadly consistent with this calendar years expected need. Excess or shortfall quantity, if any, will be sold or purchased at the spot market. Assess whether these contracts are (i) derivatives in accordance with US-GAAP and (ii) whether the firm is required to measure the contracts at fair value (with changes in fair value included in net income, disregarding the fair value option). b) Assume now that firm A settled some of the contracts net and did not take delivery of crude oil for these contracts due to an unexpected production disruption that caused an unexpected change in quantity requirements after a hurricane. Does this change your assessment for the contracts at the time of the net settlement of these contracts? If yes, does this change your assessment only for the contracts that are settled net, or all existing crude oil contracts?

c) Assume now that the quantity of the contracts that firm A purchased is twice the quantity that firm A expects to need (at the inception of the contracts). The excess contracts will be settled net. Does this change your assessment for the contracts? If yes, does this change your assessment only for the contracts that are settled net, or all existing crude oil contracts?