Contracts on non-financial items and own use

Learning objectives

• Assess whether a contract to buy or sell a non-financial item falls within the own-use exception or within the Standard, and whether designation at fair value through profit or loss is being considered.L3

Normative references

• IFRS 9 §2.4Contracts to buy or sell a non-financial item that can be settled net (in cash, by another financial instrument or by exchanging financial instruments) are accounted for as financial instruments, unless they were entered into and continue to be held for the purpose of the receipt or delivery of the item in accordance with the entity's expected purchase, sale or usage requirements (own-use exception); a contract designated at FVTPL under para. 2.5 remains within the scope. The net settlement or rapid resale practices that rule out the exception are described in para. 2.6.
• IFRS 9 §2.5A contract to buy or sell a non-financial item that can be settled net may be irrevocably designated at FVTPL even if it qualifies as own use; the designation is available only at inception of the contract and only if it eliminates or significantly reduces a recognition inconsistency (accounting mismatch) that would arise from not recognising the contract excluded from the scope.
• IFRS 9 §2.6A contract on a non-financial item can be settled net in several ways: (a) its terms permit it; (b) the entity has 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); (c) the entity has a practice of taking delivery and selling the item within a short period to generate a profit from short-term price fluctuations or a dealer's margin; (d) the item is readily convertible to cash. A contract covered by (b) or (c) is not entered into for own use and is within the Standard; the others are evaluated against the own-use exception. Paragraph amended in December 2024 (contracts referencing nature-dependent electricity, annual periods beginning on or after 1 January 2026).

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

1 question

• Sigma SA, a cable manufacturer, enters into a contract to buy copper for its production needs, with physical delivery. The contract could be settled net in cash, and Sigma has in the past settled similar contracts net on several occasions. Which conclusion should be drawn?L3