Physical settlement of contracts

Contracts to buy or sell non-financial items (such as commodities) are accounted for as IFRS 9 derivatives except when they are entered into and continue to be held for the purpose of the receipt, delivery or usage by the entity of a non-financial item (the ‘own-use scope exception’ defined in IFRS 9.2.4).

Keywords: Mazars, Thailand, IFRS, IFRS IC, IFRS 9, FVPL

27 May 2019

The IFRS IC received a request relating to contracts that do not fall within the scope of the own-use exception but that may nonetheless be settled physically by the delivery of the underlying non-financial item. In the fact pattern in question, the derivatives are not designated as part of a hedging relationship either.

The question put to the IFRS IC was whether, having initially classified the derivative as a financial instrument and measured it at fair value through profit or loss, an entity could make an additional journal entry once the underlying item had been delivered, reversing the previous entry and making a corresponding adjustment.

In this specific situation, the Committee concluded that physical settlement is not sufficient in itself to subsequently change the accounting treatment required under IFRS 9. Therefore, an entity is not permitted to retrospectively determine that the derivative meets the own-use scope exception or designate it as part of a hedging relationship at contract settlement. In other words, it is not possible to make an additional entry that would retrospectively change the impact on profit or loss of the entries made during the derivative’s term, which measured it at FVPL.