Commodity finance IFRS the 6 best examples

Commodity finance IFRS the 6 best examples – A key issue is whether the contract to deliver a non-financial item (the commodity) falls within the scope of IFRS 9 Financial Instruments. Although IFRS 9 would appear to apply only to financial assets and financial liabilities, certain contracts for non-financial items are also within its scope.

The scope of IFRS 9

In determining whether the transaction is within the scope of IFRS 9, key guidance is set out in IFRS 9 2.4. IFRS 9 2.4 notes that

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or in another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale, or usage requirements.’

Thus, in determining whether the contract falls within the scope of IFRS 9, it is necessary first to determine whether the contract permits:Commodity finance IFRS the 6 best examples

  • Net settlement in cash or in another financial instrument; or Commodity finance IFRS the 6 best examples
  • Can be settled by exchanging financial instruments, as if the contract itself is a financial instrument.

An example of net settlement in cash is where a commodity producer enters into a contract to supply a specified amount of a commodity and, in addition, pays or receives an amount in cash based on the difference between the market price of the commodity on the date of its supply and the price stated in the contract.

Settlement by the exchange of financial instruments would occur where part or all of the contract can be paid in cash, instead of through the physical delivery of the commodity.

IFRS 9 2.6 notes that there are various ways in which a contract to buy or sell a non-financial item, such as a commodity, can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:  Commodity finance IFRS the 6 best examples

  1. When the terms of the contract permit either party to settle it net in cash or in another financial instrument or by exchanging financial instruments
  2. When the ability to settle net in cash or in another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse) Commodity finance IFRS the 6 best examples
  3. When, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short-term fluctuations in price or dealer’s margin; and Commodity finance IFRS the 6 best examples
  4. When the non-financial item that is the subject of the contract is readily convertible to cash.’ Commodity finance IFRS the 6 best examples

The fact that IFRS 9 2.6(d) states that net settlement includes all circumstances in which the non-financial item that is subject to the contract is readily convertible to cash means that the vast majority of commodity loans are considered to be capable of net settlement. This is because many commodities involved in these arrangements are traded on an active market on which they can be sold. Commodity finance IFRS the 6 best examples

IFRS 9 2.6(d) also notes that: Commodity finance IFRS the 6 best examples

  • ‘A contract to which (b) and (c) applies is not entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements, and accordingly, is within the scope of this Standard Commodity finance IFRS the 6 best examples
  • Other contracts to which paragraph 5 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements, and accordingly, whether they are within the scope of this Standard.’

The test that needs to be applied is whether the contract will always be settled through the physical delivery of commodity which has been extracted by the producer as part of its own operations. If so then, the contract might fall outside the scope of IFRS 9, on the basis that it meets the ‘own use exemption’, although the precise contractual terms still need to be reviewed in detail (for example, see ‘Options’ below). However, if the contract does fall within the scope of IFRS 9, it will be accounted for as a financial instrument. Commodity finance IFRS the 6 best examples

See IFRS 9 Own use scope exemption regarding the key considerations in the application of the own use exemption Commodity finance IFRS the 6 best examples

Disclosures Commodity finance IFRS the 6 best examples

As illustrated below, the effect of the conclusion as to whether a commodity loan falls within the scope of IFRS 9 can give rise to very significant differences in accounting. Consequently, in addition to disclosures about the arrangement itself, it is likely that the analysis carried out in determining whether an arrangement gives rise to a financial instrument within the scope of IFRS 9 will need to be disclosed as a key judgement in accordance with IAS 1 22 (judgements that have the most significant effect on amounts reported in financial statements). Due to the significance of assumptions made about estimates of future physical deliveries of commodities, disclosure may also be required about estimation uncertainties (IAS 1 125).

1 Commodity loan not in scope of IFRS 9

Producer X enters into a ’gold loan’ with financier Y. Producer X is advanced CU100m in cash. The liability will be settled by producer X delivering gold that it has extracted from its mining facility. The contract sets a fixed sales price for gold at CU1,500/oz. That is, the CU100m will be settled through the delivery of the first 66,667 oz of gold that is extracted, regardless of the future market price. There is no time limit within which the gold is required to be delivered.

This means that the financier’s return will vary, depending on whether the market price of gold increases or falls and on the timing of delivery of gold. Producer X’s forecasts indicate that the amount of gold expected to be extracted from its mining facility is substantially in excess of 66,667 oz.

Because the ‘gold loan’ can only be settled through the physical delivery of gold extracted from producer X’s own mine, the contact meets the ‘own use exemption’ in IFRS 9. Consequently, the loan will be accounted for as a prepayment for the future delivery of gold, and hence as an executory contract.

Illustrative accounting entries are as follows: Commodity finance IFRS the 6 best examples

Cash Commodity finance IFRS the 6 best examples

CU100m

Deferred revenue / Contract delivery liability Commodity finance IFRS the 6 best examples

CU100m

Receipt of cash and recording of associated deferred revenue Commodity finance IFRS the 6 best examples 

At the next reporting date, no deliveries of gold have taken place. Regardless of changes in the spot price of gold, no accounting entries will be made. This is because the subsequent deliveries of gold are accounted for as an executory contract. Commodity finance IFRS the 6 best examples 

During the next reporting period, the ‘gold loan’ is settled by the physical delivery of gold. At the time of delivery, the spot price of gold is CU1,600/oz. The accounting entry is:

Deferred revenue / Contract delivery liability Commodity finance IFRS the 6 best examples 

CU100m

Revenue in profit or loss Commodity finance IFRS the 6 best examples 

CU100m

Release of deferred revenue arising from settlement of the ‘gold loan’ Commodity finance IFRS the 6 best examples 

The example illustrates that, where a commodity loan is outside the scope of IFRS 9 and is therefore accounted for as an executory contract, the cash received is classified as a prepayment and:

  • No amounts are recorded in profit or loss until the commodity is delivered1
  • Revenue is recorded at the contract price for the commodity; and Commodity finance IFRS the 6 best examples 
  • No amounts are recorded to recognise changes in the spot price of the commodity. Commodity finance IFRS the 6 best examples 

Accounting for long term prepayments for supply contracts Commodity finance IFRS the 6 best examples 

As illustrated above, where a commodity loan is accounted for as an executory contract the accounting may be that a long term prepayment is recorded for the supply of the commodity.

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IFRS 15 Revenue from contracts with customers requires sellers to account for the time value of money if the adjustment would be significant. So it has to be determined if commodity loans that are prepayments for inventory, need to account for a financing cost in respect of those loans. Commodity finance IFRS the 6 best examples 

2 Commodity loan in scope of IFRS 9

Producer X enters into a ‘gold loan’ with financier Y. Producer X is advanced CU100m in cash on 1 January 20X2. The liability will be settled by producer X delivering gold that it has extracted from its mining facility. The contract sets a fixed sales price for gold at CU1,500 oz (the present value of the one year forward price). That is, the CU100m will be settled through the delivery of 66,667 oz of gold in one year’s time, regardless of the future market price. The financier’s return will vary, depending on whether the market price of gold increases or falls.

Producer X’s forecasts show that substantially in excess of 66,667 oz of gold is expected to be extracted during the period of one year from the date on which the contract is entered into with financier Y. Commodity finance IFRS the 6 best examples 

In addition, the contract contains an option for financier Y to demand repayment in cash instead of gold, to the extent that producer X extracts gold from its mining facility. The amount of cash paid would be calculated using the spot price of gold at the payment date; this would mean that, instead of the lender taking physical delivery of the gold and selling it on the market, the lender instead requires producer X to sell the gold and deliver the gross cash proceeds.

Because financier Y has an option to require gross cash settlement of part or all of the amounts that would otherwise be settled through the physical delivery of gold, the contract fails the IFRS 9 ‘own use exemption’. As noted above, this is because producer X does not have control over whether the loan from financier Y is settled through physical delivery of gold, or in cash. Consequently, the contract is required to be accounted for as a financial instrument (or as a number of financial instruments, depending on the analysis of the contract).

The accounting analysis that is then required highlights one of the more complex areas of IFRS 9. Commodity finance IFRS the 6 best examples 

This is because it is first necessary to determine what type of financial instrument(s) result from the contract. In particular:

  1. Does the contract result in a single financial instrument? If so, what is that instrument? Commodity finance IFRS the 6 best examples 
  2. Does the contract result in more than one financial instrument? If so, what are they? Commodity finance IFRS the 6 best examples
  3. If the contract does result in more than one financial instrument, are there any accounting options available to producer X?

For question 1, the lending agreement does not create a single financial instrument. In particular, the lending agreement:

  • Does not give rise to a simple loan, as the repayments are made either through the delivery of gold or through the delivery of cash where the amount paid is linked to the price of gold
  • Does not give rise to a stand-alone derivative contract, because the lender prepays the purchase price for the gold. This means that the lending agreement fails the definition of a derivative, as the initial net investment (the amount paid) is not less than would be required for other types of contracts that have a similar response to changes in market factors.

For question 2, in certain circumstances IFRS 9 requires a contract to be accounted for as giving rise to a ‘host contract’ such as a loan, together with one or more embedded derivatives. The ‘host loan’ would typically be measured at amortised cost; the embedded derivative(s) would be measured at Fair Value through Profit or Loss (FVTPL). The technical analysis of the example set out above is that it gives rise to a CU100m loan (the ‘host contract’) together with a total return swap linked to the future price of gold (the ‘embedded derivative’). IFRS 9 requires to following approach to be followed: Commodity finance IFRS the 6 best examples 

  • The host contract is recorded as a fixed rate interest bearing loan. The interest rate used is the market rate of interest that would apply to a loan on a stand-alone basis (that is, without any embedded feature). Consequently, the implied fair value of the host loan is CU100m
  • The embedded derivative is recorded as a swap contract under which a CU100m loan at a market rate of interest is swapped for an arrangement under which the lender receives a return based on the price of gold. The terms of the swap are set to result in the embedded derivative having a zero fair value on initial recognition. In order to achieve this, the inputs are set such that the discounted present value of the pay and receive ‘legs’ of the swap are identical. That is, the inputs are set so that the fair value of a CU100m loan at a market rate (the ‘pay leg’ of the swap) is the same as the fair value of the gold that is expected to be received by the lender (the ‘receive leg’ of the swap)
  • For subsequent accounting, the host contract is accounted for on an amortised cost basis (meaning that notional interest will be accrued over the 12 month term of the loan). The embedded derivative will be accounted for at FVTPL. Commodity finance IFRS the 6 best examples 

The overall effect of the accounting entries will be that producer X will account for a fixed rate loan, with the interest charges and capital repayment amounts being modified depending on the future price of gold. If the price of gold increases, then producer X will transfer more value to the lender than under a plain ‘capital and interest’ loan, and so the fair value of the embedded derivative will increase with an associated charge to profit or loss.

For question 3, IFRS 9 also contains a ‘fair value option’. Under the fair value option when a contract contains one or more embedded derivatives that, under IFRS 9’s standard approach, would be required to be separated from a host contract and accounted for at FVTPL, that contract can instead be measured in its entirety at FVTPL. In practice, this can make the subsequent accounting simpler than if a contract is accounted for as giving rise to a host contact plus one or more embedded derivatives.

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Contract accounted for under the standard IFRS 9 approach (host contract plus embedded derivative) Under this approach, only the embedded derivative is remeasured to fair value at each reporting date. In contrast, the host loan is accounted for at amortised cost, meaning that its carrying amount is not adjusted for future changes in interest rates, or for future changes in producer X’s own credit rating (and hence changes in interest rates that lenders would require to be paid on a new loan).

Illustrative accounting entries:

For the purposes of this illustration, assume that the market rate of interest on inception of the arrangement that would apply to a loan on a ‘stand alone’ basis is 10%.

Cash Commodity finance IFRS the 6 best examples 

CU100m

Loan Commodity finance IFRS the 6 best examples 

CU100m

Derivative Commodity finance IFRS the 6 best examples 

Receipt of cash and recording of associated loan Commodity finance IFRS the 6 best examples 

At the six month interim reporting date, no deliveries of gold have taken place. The present value of the forward price of gold is CU1,550/oz, an increase of CU50/oz compared with the amount at initial recognition. The accounting entries are: Commodity finance IFRS the 6 best examples 

Interest expense Commodity finance IFRS the 6 best examples 

CU5.00m

Loan Commodity finance IFRS the 6 best examples 

CU5.00m

Notional interest accreted on the host loan (10%*CU100m*6/12)

Derivative Commodity finance IFRS the 6 best examples 

CU1.67m

Interest income Commodity finance IFRS the 6 best examples 

CU1.67m

Change in the carrying amount of the embedded swap (CU1,550*66,667)-(CU100m+(10%*CU100m*6/12))

The embedded swap is an asset at this point, because the return implied by the present value of the forward price of gold is less than the return that would have been obtained from a loan at an open market rate of 10%.

Note: For the purposes of this example, it has been assumed that applicable interest rates have remained constant. If interest rates had not remained the same (for example, due to changes in market rates or a change in producer X’s credit status) then the change in the derivative’s fair value at the end of the interim period would have been different.

At the end of the financial year, the ‘gold loan’ is settled by the physical delivery of gold. At the time of delivery, the spot price is CU1,750/oz.

The accounting entries are:

Interest expense

CU5.00m

Loan

CU5.00m

Notional interest accreted on the host loan (10%*CU100m*6/12)

Interest expense

CU8.33m

Derivative

CU8.33m

Change in the carrying amount of the embedded swap (CU1,750 x 66,667)–(CU100m+(10% x CU100m x 12/12))+CU1.67m

Note that the increase in the price of gold has resulted in the embedded swap gaining substantial value, with the adjustment resulting in a carrying amount of CU6.66m. The effect is that the lender has obtained a substantially greater rate of return than would have been obtained from a loan on a stand-alone basis.

The final journal entry at the financial year end is:

Loan

CU110.00m

Derivative

CU6.66m

Revenue

CU116.66m

Note: For illustrative purposes, the host contract liability and the embedded swap have been accounted for separately. In practice, these two components would typically be disclosed as a single amount on the face of the balance sheet (or statement of financial position).

This example illustrates that, where the commodity loan is within the scope of IFRS 9 and is therefore classified as a financial liability:

  • There is income statement volatility until the commodity is delivered
  • Revenue is recorded at the spot price of the commodity when it is delivered
  • An amount of finance expense / finance income is recorded, depending on future changes in the market price of the commodity.

In addition, while the fair value option would appear to result in a more straightforward approach to accounting for the arrangement, this can give rise to additional volatility in amounts reported in financial statements. This is because the effect of changes in market rates of interest are also reflected in changes in the fair value of financial liabilities.

3 Accounting for an interest bearing own use exempted commodity loan

In practice, commodity loans bear ‘interest’, reflecting the time value of money and the financier’s assessment of the credit risk of the producer. The fact that the amount of commodity to be delivered in future may increase by an amount which mirrors an interest charge that would be applied to a cash settled loan does not necessarily mean that it is impossible to meet the terms of the IFRS 9 ‘own use exemption’, and therefore account for the arrangement as an executory contract.

A similar assessment to the examples above will be required, taking into account key terms of the arrangement (including those set out in the key considerations section).

As an example, producer X enters into a ‘gold loan’ with financier Y. Producer X is advanced CU100m in cash, which attracts interest at 10%. The liability will be settled by producer X delivering gold that it has extracted from its mining facility.

The contract sets a fixed sales price for gold at CU1,500 oz. That is, the CU100m and any accrued interest will be settled through the delivery of gold at CU1,500/oz, regardless of the future market price. The financier’s return will vary, depending on whether the market price of gold increases or falls.

There is no alternative settlement option in the contract, except for circumstances in which producer X’s mining facility stops production for an extended period in which part or all of the amount due is required to be settled in cash. However, the potential for this to happen is considered very remote.

It is anticipated that the gold will be delivered at the end of 2 years from the date on which the CU100m is advanced.

Producer X’s forecasts indicate that the amount of gold expected to be extracted from its mining facility is substantially in excess of the amount expected to be required to settle the commodity loan.

Because the ‘gold loan’ can only be settled through the physical delivery of gold extracted from producer X’s own mine, the contact meets the ‘own use exemption’ in IFRS 9. Although there is the potential for cash settlement, the potential for this to arise is very remote and, in consequence, this feature does not result in the contract failing the ‘own use exemption’ (although this needs to be kept under review during the term of the agreement).

Therefore, the loan will be accounted for as a prepayment for the future delivery of gold, and hence as an executory contract.

The liability in oz of gold is as follows:

Interest in OZ

Liability in OZ

Initial advance of the loan

66,667

First anniversary

6,667

73,333

Second anniversary

7,333

80,667

Because the arrangement is accounted for as an executory contract, the selling price of the related gold will be CU1,240/oz (CU100m/80,667oz), an amount significantly lower than both the ‘spot’ and the contract rates. This is because the 10% interest charge is not applied to the liability of CU100m.

Commodity loans and price changes Commodity finance IFRS the 6 best examples 

A further issue to consider is that commodity loans frequently include provisions under which the commodity price is adjusted, in part of in full, for future movements in the market price of the commodity. This can be achieved by including ‘caps’, ‘floors’ or ‘collars’ in respect of the commodity price. A cap will restrict the maximum commodity price, while a floor restricts the minimum commodity price. A collar will set upper and lower limits to the price which is to be used. Commodity finance IFRS the 6 best examples 

Care is needed when analysing these provisions. This is because, even though the contract may meet the terms of the IFRS 9 ‘own use exemption’ and be scoped out of IFRS 9, any embedded derivatives contained within the contract are not scoped out of IFRS 9 and may need to be accounted for separately. If this is required, the embedded derivative(s) will be accounted for at fair value through profit or loss. Commodity finance IFRS the 6 best examples 

As examples of embedded derivatives that may or may not need to be accounted for separately: Commodity finance IFRS the 6 best examples 

  • A cap on the selling price of the commodity would be expected to be accounted for as a separable embedded derivative. This is because a selling price cap provides ‘one way’ risk protection, in that there is (from the borrower’s perspective) downside risk only Commodity finance IFRS the 6 best examples 
  • Similarly, a floor on the selling price of the commodity would be expected to be accounted for as a separable embedded derivative. This is because the selling price floor provides ‘one way’ risk protection, in that (from the borrower’s perspective) there is upside risk only Commodity finance IFRS the 6 best examples 
  • A collar (that is, a combination of a price cap and price floor) would not necessarily be expected to be accounted for as a separable embedded derivative. This lack of a requirement to separate the embedded derivative applies only where the spot price at inception of the contract is between the cap and floor amounts, meaning that both the cap and floor are ‘out of the money’, and these features are not leveraged. Commodity finance IFRS the 6 best examples 

4 Loan which meets the IFRS 9 ‘own use exemption’ and contains a price ‘collar’

Producer X enters into a ’gold loan’ with financier Y. Producer X is advanced CU100m in cash. The liability will be settled by producer X delivering gold that it has extracted from its mining facility. The contract sets a sales price for gold at CU1,500 oz. Commodity finance IFRS the 6 best examples 

However, if the spot price of gold changes from CU1,500/oz, the quantity of gold to be delivered will be adjusted. If the price falls to CU1,400/oz or below then producer X will deliver 73,000 oz of gold. If the gold price increases to CU1,600/oz or more then producer X will deliver 60,000 oz of gold. There is no alternative settlement option in the contract.

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It is anticipated that the gold will be delivered evenly over a 4 year period from the date on which the CU100m is advanced.

Producer X’s forecasts indicate that the amount of gold expected to be extracted from its mining facility is substantially in excess of the amount expected to be required to settle the commodity loan. Commodity finance IFRS the 6 best examples 

Because the ‘gold loan’ can only be settled through the physical delivery of gold extracted from producer X’s own mine, the contact meets the ‘own use exemption’ in IFRS 9. Consequently, the loan will be accounted for as a prepayment for the future delivery of gold, and hence as an executory contract.

Because both of the features that would result in a change in the amount of gold to be delivered are out of the money at inception of the contract, these features are determined not to require to be accounted for as separable embedded derivatives (by analogy to IFRS 9 B4.3.8). Commodity finance IFRS the 6 best examples 

It is then necessary to consider the appropriate pattern of revenue recognition. This is because the assessment of the amount of gold to be delivered in return for the prepayment of CU100m will vary, depending on the future market price of gold. Commodity finance IFRS the 6 best examples 

The contract provides for three possible outcomes in respect of the quantity of gold to be delivered by producer X:

Price range

Quantity to be delivered

Commodity finance IFRS the 6 best examples

Below CU1,401/oz

73,000

CU1,401 to CU1,599/oz

66,667

Above CU1,599/oz

60,000

At the end of period 1, producer X has delivered 18,000 oz of gold, and forecasts total required deliveries to be 66,667 oz.

At the end of period 2, producer X has delivered 30,000 oz of gold, and forecasts total required deliveries to be 73,000 oz.

At the end of period 3, producer X has delivered 45,000 oz of gold, and forecasts total required deliveries to be 60,000 oz.

At the end of period 4, producer X has settled its liability by delivering 66,667 oz of gold.

The revenue to be recognised in each period and the average price per oz is shown below:

Oz delivered in period

Oz delivered cumulative

Estimated cumulative percentage delivered

Revenue recognised

Revenue per oz (in period)

Period 1

18,000

18,000

27%

CU27m

CU1,500

Period 2

12,000

30,000

41%

CU14m

CU1,175

Period 3

15,000

45,000

75%

CU34m

CU2,260

Period 4

21,667

66,667

100%

CU25m

CU1,154

Total

66,667

CU100m

As can be seen from the table above, although at first glance accounting for the ‘gold loan’ as an executory contract would appear to be simpler and give rise to less volatile earnings than would arise from the application of IFRS 9, it can lead to quite dramatic effects on revenue recognition as the caps and floors are forecast to be effective. It is therefore essential that the terms of these loans are fully disclosed in the producer’s financial statements.

5 Loan which does not meet the IFRS 9 ‘own use exemption’ and contains a price ‘collar’

Assume the same contractual terms and analysis as in the example above, except that the arrangement is assessed not to meet the IFRS 9 ‘own use exemption’ due to an additional clause that permits the producer to ‘buy out’ of the contract. This additional clause results in the ‘gold loan’ failing the IFRS 9 ‘own use exemption’.

In these circumstances, the entire arrangement would be accounted for as a single derivative contract. This is because, if the contract did not contain the price ‘collar’, it would be accounted for as a derivative. IFRS 9 does not permit separate accounting for components of a contract that are all accounted for at fair value through profit or loss. Because derivatives are measured at fair value through profit or loss, the three derivative features (the sales contract itself, the price cap and the price floor) are accounted for as a single financial instrument.

6 Time value of options – Transaction related hedged item – Commodity price

  • Entity X is a copper producer and wishes to hedge sales that are forecast to take place on 30 September 20X4;
  • On 1 January 20X4 Entity X enters into a put option to sell 1,000 tonnes of copper for CU50/tonne. The put option expires on 30 September 20X4 (assume that the hedge is 100% effective);
  • The copper spot price on 1 January 20X4 is CU50/tonne;
  • Entity X pays CU2,000 for the put option;
  • Initial time value is CU2,000 = (CU2,000 – ((CU50-CU50) x 1,000 tonnes).

1 January 20X4

Option

CU2,000

Cash

CU2,000

To recognise the purchase of the option.

Subsequently, on 1 March 20X4:

  • The fair value of the option is CU5,000;
  • The copper spot price is CU46/tonne;
  • Intrinsic value is CU4,000 = ((CU50-CU46) x 1,000 tonnes);
  • The time value of the option is CU1,000 = (CU5,000 – CU4,000).

1 March 20X4

Option

CU3,000

OCI – Option time value reserve

CU1,000

OCI – Cash flow hedge (CFH) reserve

CU4,000

To recognise the change in fair value of the option, taking the change in the intrinsic component (the hedging instrument) to the CFH reserve, and recognising the change in time value in the option time value reserve.

Subsequently, on 30 September 20X4:

  • The fair value of the option is CU 10,000;
  • The copper spot price is CU40/tonne;
  • The time value of the option is CU0;
  • 1,000 tonnes of copper are sold at the spot rate.

30 September 20X4

Trade receivable Commodity finance IFRS the 6 best examples 

CU40,000

Sales revenue Commodity finance IFRS the 6 best examples 

CU40,000

To recognise sales of 1,000 tonnes of copper at spot rate of CU40/tonne.

30 September 20X4

Option Commodity finance IFRS the 6 best examples 

CU5,000

OCI – Option time value reserve Commodity finance IFRS the 6 best examples 

CU1,000

OCI – Cash flow hedge (CFH) reserve Commodity finance IFRS the 6 best examples 

CU6,000

To recognise the change in fair value of the option, taking the change in the intrinsic component (the hedging instrument) to the CFH reserve, and recognising the change in time value in the option time value reserve.

30 September 20X4

OCI – Cash flow hedge (CFH) reserve Commodity finance IFRS the 6 best examples 

CU10,000

Sales Commodity finance IFRS the 6 best examples 

CU2,000

Sales Commodity finance IFRS the 6 best examples

CU10,000

OCI – Option time value reserve Commodity finance IFRS the 6 best examples 

CU2,000

To reclassify the amount in the CFH reserve and the option time value reserve against sales revenue.

Calculation of copper sales revenue Commodity finance IFRS the 6 best examples 

Copper sales at spot rate Commodity finance IFRS the 6 best examples 

CU40,000

Gain or loss recycled from cash flow hedge reserve Commodity finance IFRS the 6 best examples 

CU10,000

Initial time value of option Commodity finance IFRS the 6 best examples 

CU(2,000)

Total Commodity finance IFRS the 6 best examples 

CU48,000

Adjustments to sales revenue from hedging copper sales using copper put option

Real life example

Physical Off take and prepay for Century Mining Corporation (CMM)

Commodity finance IFRS the 6 best examples

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