Firm purchase commitment

IFRS Definition (so different from underwriting and other finance terms)

An agreement with an unrelated party, binding on both parties and usually legally enforceable, that:

  1. specifies all significant terms, including the price and timing of the transactions, and
  2. includes a disincentive for non-performance that is sufficiently large to make performance highly probable.

A note: Virgin Atlantic announced in March last year that it was ordering 15 of the 787-9 Dreamliners – with options on ordering another eight 787-9s and purchase rights on a further 20 aircraft.

An order means that the buyer has made a firm purchase commitment to purchase a certain aircraft in the production line, at a certain price. In the airline industry the buyer may cancel, but there will probably be a substantial penalty for doing so. In other industries it is more regular to fulfil a firm purchase commitment to ensure timely delivery of (critical) raw materials and components used in the manufacturing process.

An option means that the manufacturer has reserved a certain aircraft in the production line for the buyer, usually at a certain price. However, the buyer will make the decision on whether to convert this to an “order” at a later date. There is less commitment than with an “order”.

purchase right is even less of a commitment than an “option.” This just means that the buyer has agreed to purchase aircraft at a certain price, but it’s not tied to a specific aircraft at that time.


Net losses on firm purchase commitments to acquire goods for inventory result from a contract price that exceeds the current market price. If a firm expects that losses will occur when the purchase occurs, expected losses, if material, should be recognised in the accounts and separately disclosed as losses on the income statement of the period during which the decline in price takes place.

Firm purchase commitment

Firm purchase commitment

Firm purchase commitment Firm purchase commitment Firm purchase commitment Firm purchase commitment Firm purchase commitment Firm purchase commitment

Leave a comment