Contracts on non-financial items that can be settled net

Learning objectives

• Analyse whether a contract to buy a non-financial item is within the scope of IAS 32, depending on whether it can be settled net or is held in accordance with the entity's expected usage requirements.L3
• Justify the conclusion reached for a commodity contract in the light of the entity's usage requirements.L3

Normative references

• IAS 32 §8The Standard applies, as if they were financial instruments, to contracts to buy or sell a non-financial item that can be settled net (in cash, in another financial instrument or by exchanging financial instruments), except for contracts entered into and held for the entity's expected purchase, sale or usage requirements; it nevertheless applies to contracts that the entity designates as measured at fair value through profit or loss under IFRS 9 (para. 2.5).
• IAS 32 §9Net settlement of a contract on a non-financial item may arise from the terms of the contract, from a practice of settling similar contracts net (with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse), from a practice of taking delivery and selling within a short period to generate a profit from short-term price fluctuations or a dealer's margin, or from the item being readily convertible to cash; contracts covered by a practice ((b) and (c)) are not held for the entity's own requirements and are within the scope, the others being assessed case by case.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

1 question

• Cobalt SA, a cable manufacturer, enters into a contract to buy 500 tonnes of copper for delivery in six months at a fixed price. The contract could be settled net in cash, but Cobalt entered into it and holds it for its expected usage requirements in its production (case facts). Which conclusion is consistent with the rule on contracts for non-financial items?L3