A company may be required to account for a contract to buy or sell a non-financial item – e.g. commodities such as crude oil or metals – under IFRS® Standards for financial instruments as a derivative at fair value through profit or loss. [IFRS 9.2.4]
Financial instruments accounting applies if the contract can be settled net in cash or another financial instrument – which includes cases where the non-financial item is readily convertible into cash – unless the own use exemption applies. [IAS 32.8, IFRS 9.2.4]
The economic turbulence resulting from the COVID-19 coronavirus pandemic may mean that some of these contracts no longer qualify for the own use exemption.
The COVID-19 outbreak may affect when a company needs to account for a commodity contract as a derivative.
To qualify for the own use exemption, a contract to buy or sell a non-financial item needs to be entered into and continue to be held to receive or deliver that non-financial item in accordance with the company’s expected purchase, sale or usage requirements. In addition, if a company has a past practice of settling similar contracts net in cash, then a contract would not satisfy the own use exemption. [IFRS 9.2.4, 2.6]
The COVID-19 outbreak may cause:
These circumstances may undermine a company’s ability to apply the own use exemption:
Judgement may be required to determine whether the company has developed a past practice of net settlement that precludes it from applying the own use exemption. This might not be the case if net settlements are infrequent and respond to events that could not have been foreseen at inception of the contract. [Insights 126.96.36.199]
In addition, a company needs to evaluate the notion of ‘similar contracts’ in the context of its own business practices. [Insights 188.8.131.52]
Reassess whether derivative accounting may be required – i.e. because the own use exemption no longer applies – for sale and purchase contracts as a result of:
References to ‘Insights’ mean our publication Insights into IFRS
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