An item whose value or performance changes in reaction to non-financial risks or developments. Non-financial variables can either be those not specific to a party to the contract or those specific to a party to the contract (hence, do not give rise to a derivative). Non-financial variables that are not specific to a party to the contract include an index of losses arising from natural disasters (earthquake, floods, etc.) in a particular region and an index of temperatures in a particular city.

Non- financial variables specific to a party to the contract include the occurrence or non-occurrence of an event that damages or destroys an asset of a party to the contract (such as, a fire breaking out at the party’s premises). Furthermore, a change in the fair value of a non-financial asset (broadly, any item that is not a financial instrument) would be specific to the owner of that asset if the fair value reflects not only changes in market prices for such assets (a financial variable) but also the condition of the specific non-financial asset held (a non-financial variable). For example, if a guarantee of the residual value of a specific asset exposes the guarantor to the risk of changes in the asset’s physical condition, the change in that residual value is specific to the owner of the asset.