Financial Reporting · Financial Instruments: Scope and Definitions

Contracts to Buy or Sell Non-Financial Items under Ind AS 109

Updated 5 October 2026 · Fact-checked

A contract to buy or sell a non-financial item (like copper or power) is inside Ind AS 109 if it can be settled net in cash or another financial instrument, unless it was entered into and is held for your expected purchase, sale or usage needs (own use). You may designate an own-use contract at FVTPL if that removes an accounting mismatch.

Understand Contracts to Buy or Sell Non-Financial Items

Ind AS 109 mainly deals with financial assets and liabilities. But a contract to buy or sell a commodity, such as steel, crude oil or electricity, can behave like a derivative. If you can settle it by paying or receiving the price difference, its value moves like a financial instrument. So the standard pulls some of these contracts into its scope.

The starting rule: a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if it were a financial instrument. Such a contract is within Ind AS 109. The exception is a contract entered into and continuing to be held for the purpose of receiving or delivering the non-financial item in line with the entity's expected purchase, sale or usage requirements. This is the own-use exemption. If it applies, the contract stays outside Ind AS 109 and is treated as a normal executory contract (a purchase or a sale, recognised when delivery happens), subject to Ind AS 37 if it turns onerous.

So the key question is whether the contract can be settled net. It is treated as net settled in these situations:

The terms of the contract permit either party to settle net in cash or another financial instrument.
The ability to settle net is not explicit in the terms, but the entity has a practice of settling similar contracts net.
The entity has a practice, for similar contracts, of taking delivery of the underlying and selling it within a short period after delivery to generate a profit from short-term price fluctuations or a dealer's margin.

Para 2.6(d) also refers to items that are readily convertible to cash. This is a clarification, not a fourth situation. The practices in the second and third situations above already trigger net settlement. Being readily convertible to cash does not, on its own, make a contract net settled. It matters for written options, as explained next (para 2.7).

If any of the three situations above exists, own use is not available for those contracts. A written option that can be settled net in cash or by exchanging financial instruments, or that relates to an item that is readily convertible to cash, also cannot qualify for own use, because the writer does not control whether it will be exercised.

Even where the own-use exemption is available, you may irrevocably designate the contract at fair value through profit or loss (FVTPL) at inception if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise from not recognising that contract. Once designated, the contract is accounted for as a financial instrument measured at fair value, with changes in profit or loss.

Key rules to remember

Scope rule: Contract to buy/sell non-financial item → Ind AS 109 if it can be settled net, EXCEPT own-use contracts; Net settlement means in cash, another financial instrument, or by exchanging financial instruments.
Own-use exemption condition: Entered into AND continues to be held for receipt/delivery per expected purchase, sale or usage requirements; Both parts matter: the purpose at inception and the continuing purpose. Tainting by net settlement practice defeats it.
Net settlement indicators: Terms permit net settlement OR practice of net settling similar contracts OR practice of taking delivery and selling shortly for profit/dealer margin; Any one of these situations means the contract is not for own use. Readily convertible to cash is not a separate indicator: the practices above already trigger net settlement, and readily convertible alone does not. It matters for written options.
Written option: Written option that can be settled net, or on an item readily convertible to cash → not own use; Falls within Ind AS 109. If it meets the derivative definition, it is accounted for as a derivative at FVTPL.
FVTPL designation: Own-use contract may be designated at FVTPL at inception if it eliminates or significantly reduces an accounting mismatch; Irrevocable. Available only at inception, not later. The designated contract is accounted for as a financial instrument measured at FVTPL.

How to solve Contracts to Buy or Sell Non-Financial Items questions

Use the same sequence for every case on commodity, energy or metal contracts. Always conclude with the accounting consequence.

1Identify the contract: is the underlying a non-financial item (commodity, power, metal, gas)? If it is a financial item, this topic does not apply.
2Check whether the contract can be settled net: read the terms, then look at the entity's past practice with similar contracts.
3Check for delivery-and-resell behaviour: does the entity take delivery and sell it shortly after to earn short-term profit or a dealer margin? If the item is readily convertible to cash, it matters only if the entity also settles net or takes delivery and sells quickly.
4Check whether the contract is a written option. If it can be settled net, or relates to an item readily convertible to cash, it cannot be own use.
5Decide on own use: if the contract was entered into and is held for expected purchase, sale or usage requirements and no net settlement situation applies, the own-use exemption applies and the contract is outside Ind AS 109.
6If own use applies, consider the FVTPL designation where an accounting mismatch exists. If it does not apply, the contract is within Ind AS 109. Test it against the derivative definition (an underlying, little or no initial net investment, settlement at a future date). If it meets the definition, account for it as a derivative at FVTPL.
7State the accounting: executory contract (recognise on delivery, check onerous under Ind AS 37) or derivative at fair value with gains and losses in profit or loss.

Quickest way: Three-question own-use filter

When to use it: Use it in MCQs and short case scenarios when you need the answer in under a minute.

Q1: Does the entity actually need or intend to use or sell the physical item in its own operations? If no, the contract is within Ind AS 109 and, if it meets the derivative definition, is a derivative at FVTPL.
Q2: Any net settlement in the terms, or any past practice of net settling, or take-and-resell for profit? If yes, the contract is within Ind AS 109 and, if it meets the derivative definition, is a derivative at FVTPL.
Q3: Is it a written option that can be settled net or relates to a readily convertible item? If yes, the contract is within Ind AS 109 and, if it meets the derivative definition, is a derivative at FVTPL.
If all three are clear, it is own use and outside Ind AS 109. Then ask only whether FVTPL designation is wanted to remove a mismatch.

Common mistakes in Contracts to Buy or Sell Non-Financial Items

Treating every commodity contract as a derivative because the price changes
Students link price movement to a derivative and ignore the own-use exemption.
Fix: Start from the scope exception: if the contract is held for expected purchase, sale or usage needs and there is no net settlement, it is outside Ind AS 109.
Saying own use applies because the contract says physical delivery
Students read only the contract terms.
Fix: Also test the entity's practice. A history of net settling similar contracts, or taking delivery and reselling quickly, defeats own use.
Allowing own use for a written option
Students apply the same logic as to forward purchase contracts.
Fix: A written option that can be settled net, or relates to a readily convertible item, is not own use, so it is within Ind AS 109.
Treating 'readily convertible to cash' alone as proof of net settlement
Students read it as a standalone indicator.
Fix: It counts only together with a practice of net settling or of taking delivery and selling quickly. Check for that practice before concluding.
Applying the FVTPL designation after inception or reversing it later
Students confuse it with reclassification rules.
Fix: The designation is only at inception and is irrevocable, and it needs an accounting mismatch to be eliminated or significantly reduced.
Forgetting the accounting for an own-use contract
Students stop after concluding it is out of scope.
Fix: Say it is an executory contract recognised on delivery, and check for an onerous contract under Ind AS 37.
Treating a contract as own use for the whole portfolio when only some contracts are net settled
Students generalise from one contract.
Fix: Assess contract by contract, but remember that a practice of net settling similar contracts affects those similar contracts.

Worked examples

Example 1

Sunrise Metals Ltd, a manufacturer, enters into a fixed-price contract to buy 500 tonnes of copper in three months for use in its cables. The contract requires physical delivery. Sunrise has always taken delivery of copper and used it in production; it has never settled such contracts net or resold copper. Copper prices have since fallen. Is the contract within Ind AS 109?

Show the solution

The underlying, copper, is a non-financial item that is readily traded, so check the net settlement tests.
Terms: physical delivery is required, so no net settlement right in the contract.
Practice: Sunrise has never settled net and never resold copper after delivery. No indicator applies.
The contract is held to receive copper for expected usage requirements. It is not a written option.
Conclusion: the own-use exemption applies, so the contract is outside Ind AS 109.
Accounting: treat it as an executory contract. Recognise copper on delivery. The fall in price does not create a derivative gain or loss, but assess whether the contract is onerous under Ind AS 37.

Answer: The contract is a normal purchase for own use, outside Ind AS 109. Account for it on delivery, and test for an onerous contract under Ind AS 37 because prices have fallen.

Example 2

Greenfield Power Ltd buys natural gas forward contracts. In the past, it has often closed out such contracts by receiving or paying the price difference in cash before delivery date. On 1 April 2027 it entered into a new forward contract to buy 10,000 units of gas with physical delivery in six months, intending to use the gas in its plant. Does the own-use exemption apply? What if Greenfield wanted to avoid an accounting mismatch with a related fair-valued item?

Show the solution

The underlying, gas, is a non-financial item. Check net settlement.
The contract says physical delivery, but Greenfield has a practice of settling similar contracts net in cash.
A practice of net settling similar contracts means the contract is treated as capable of net settlement.
So it cannot be treated as entered into and held for own use, even though Greenfield intends to use the gas.
Result: the contract is within the scope of Ind AS 109.
Test the derivative definition: the value depends on the gas price (an underlying), the forward needs little or no initial net investment, and it is settled at a future date. It meets the definition, so it is a derivative measured at FVTPL, with changes in fair value in profit or loss.
The FVTPL designation is for contracts that would otherwise qualify for own use. Here own use is not available, so no designation is needed; the derivative is already at FVTPL.

Answer: The own-use exemption does not apply because of the past practice of net settling similar contracts. The contract is within Ind AS 109 and, as it meets the derivative definition, is accounted for as a derivative at FVTPL. The designation option is irrelevant as the contract is already at FVTPL.

Exam tips

In case scenarios, the deciding fact is usually hidden in the entity's past practice, not in the contract terms. Read the facts for any history of net settlement or quick resale.
Write the conclusion in three parts: provision (para 2.4 to 2.7 logic), facts, conclusion. Name the accounting treatment at the end.
Always mention the FVTPL designation option when the question hints at an accounting mismatch. State that it is irrevocable and made at inception.
For MCQs, eliminate options that call a contract a derivative only because the price moves, or that allow own use for written options.
Do not quote paragraph numbers unless you are sure. Describe the rule in words, which earns marks safely.

Practice questions from Financial Instruments: Scope and Definitions

Contracts to Buy or Sell Non-Financial Items: frequently asked questions

What is the own-use exemption in Ind AS 109?

It removes from Ind AS 109 a contract to buy or sell a non-financial item that was entered into and is still held to receive or deliver the item as per the entity's expected purchase, sale or usage needs. Such a contract is treated as an ordinary executory contract. It fails if the entity settles such contracts net or takes delivery and resells for short-term profit.

When is a commodity contract treated as net settled?

When its terms allow net settlement, when the entity has a practice of settling similar contracts net, or when it has a practice of taking delivery and selling quickly to make a short-term profit or dealer margin. Para 2.6(d) refers to items readily convertible to cash, but this adds no separate test, because these practices already trigger net settlement. Readily convertible to cash alone does not make a contract net settled, though it matters for written options.

Can I designate an own-use contract at FVTPL?

Yes, at inception, if it eliminates or significantly reduces an accounting mismatch that would arise from not recognising the contract. The designation is irrevocable. After designation, the contract is accounted for as a financial instrument measured at fair value through profit or loss.

Are written options on commodities eligible for own use?

No, if the written option can be settled net in cash or by exchanging financial instruments, or relates to an item that is readily convertible to cash. The writer does not control whether the option is exercised, so the contract falls within Ind AS 109. If it meets the derivative definition, it is accounted for as a derivative at FVTPL.